JLBC
Joint Legislative Budget Committee
Staff Memorandum
1716 West Adams Telephone: (602) 926-5491
Phoenix, Arizona 85007 Facsimile: (602) 926-5416
DATE: November 29, 2012
TO: Members, Joint Legislative Income Tax Credit Review Committee
FROM: Hans Olofsson, Chief Economist
SUBJECT: 2012 INCOME TAX CREDIT REVIEW - OPEN SESSION
This memo transmits background materials for the December 6, 2012 meeting of the Joint Legislative Income Tax
Credit Review Committee. The information contained in this memo is limited to those credits scheduled for review
in 2012 that do not include confidential taxpayer information, which are:
Page
♦ Family Income Tax Credit ..............................................................................................................................5
A.R.S. § 43-1073 (Individual)
♦ Credit for Solar Energy Devices; Commercial and Industrial Applications....................................................9
A.R.S. § 43-1085 (Individual)
A.R.S. § 43-1164 (Corporate)
♦ Credit for Donation to the Military Family Relief Fund ...............................................................................13
A.R.S. § 43-1086 (Individual)
♦ Credit for Contributions to Private School Tuition Organizations ................................................................17
A.R.S. § 43-1089 (Individual)
♦ Credit for Public School Extracurricular Activity Fees.................................................................................23
A.R.S. § 43-1089.01 (Individual)
♦ Credit for Solar Hot Water Heater Plumbing Stub Outs and Electric Vehicle Recharge Outlets..................36
A.R.S. § 43-1090 (Individual)
A.R.S. § 43-1176 (Corporate)
Credits that include confidential taxpayer information are reviewed in a separate memo.
Background
Laws 2002, Chapter 238 established the Joint Legislative Income Tax Credit Review Committee and specified a
schedule for review of corporate and individual income tax credits. While the 6 credits listed above will be
reviewed in open session, the following 3 credits will be discussed in executive session due to the inclusion of
confidential taxpayer information.
♦ Credit for Increased Employment in Military Reuse Zones
A.R.S. § 43-1079 (Individual)
A.R.S. § 43-1167 (Corporate)
♦ Credit for Construction Costs of Qualified Environmental Technology Facility
A.R.S. § 43-1080 (Individual)
A.R.S. § 43-1169 (Corporate)
♦ Credit for Donation of School Site
A.R.S. § 43-1089.02 (Individual)
A.R.S. § 43-1181 (Corporate)
(Continued)
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As a result of Laws 2010, Chapter 225, the Department of Revenue (DOR) may disclose confidential statistical
information to this Committee and JLBC Staff. DOR views tax credit information to be confidential if: (1) 3 or less
taxpayers claimed the credit, or (2) 90% or more of the total credit used to offset tax liability was attributable to a
single taxpayer.
The Joint Legislative Income Tax Credit Review Committee is charged with determining the original purpose of
each of the existing income tax credits and establishing a standard for evaluating the success or failure of the credit.
Pursuant to statute (A.R.S. § 43-221), the standard for evaluation of the credits may include: (1) the history,
rationale and revenue impact, (2) the benefit to the state in various economic terms, and (3) the complexity in the
use and administration of the credit.
The Credit for Solar Energy Devices and the Credit for Donation to the Military Family Relief Fund are the only
credits on the 2012 review schedule that have not been reviewed by the committee in prior years.
Limitations
There are several limitations that affect the evaluation of income tax credits. For example, the timeliness of data is
one such limitation. Because tax credit data must generally be compiled manually from actual hard-copy tax
returns, corporate credit data is currently available only through tax year 2009. Both 2009 corporate tax credit data
and 2010 individual tax credit data are preliminary and thus subject to revision.
A second limitation is the lack of performance measures for tax credits. Some credits have stated performance
measures or goals, but most of the credits do not have objectives included in statute. Chapter 238, however, requires
any new credit to include a clause that explains the rationale and objective of the credit (A.R.S. § 43-223).
Finally, the evaluation of tax credits in terms of their economic benefits to the state is often difficult to conduct since
the data required to do so is rarely available. For example, while the amount spent on equipment or property by a
facility is reported for purposes of claiming the environmental technology facility credit, there is no data on the
number of new jobs associated with these investments.
2012 Review
The following information is provided (where applicable) for each of the credit categories:
Description - the definition of the tax credit, and how the credit is calculated.
Refundable - whether the credit is refundable or nonrefundable. A nonrefundable credit can never exceed the
taxpayer’s tax liability. Instead, any amounts not used to offset the taxpayer’s liability in a taxable year can either
be carried forward to future tax years or must be forfeited in the same tax year. By contrast, a refundable credit is
allowed to exceed the taxpayer’s tax liability and any excess amounts are refunded to the taxpayer. None of the
credits included in the current review is refundable.
Transferable - whether or not any unused portion of the credit can be sold or otherwise transferred to other
taxpayers. None of the credits included in the current review is transferable.
Carry Forward - whether or not any unused nonrefundable credit may be carried forward into subsequent tax years,
and if so, for how many years.
History and Rationale - the year the tax credit was implemented, revisions to the credit since its enactment, and
relevant information regarding the intended purpose of the credit.
Revenue Impact - based on data reported by DOR, information for each tax year on the number of claimants, the
amount of total available credit, credit used, and credit carried forward to a subsequent tax year.
Economic Benefits - a summary of information available related to any economic benefits associated with each tax
credit, including economic development, new investments, job creation or retention of existing jobs, and any other
economic benefits that may be specific to each credit.
(Continued)
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Complexity - information related to the complexity of administration and application of each tax credit, including the
perspective of the state agencies administering the credit, as well as the trade associations and representatives of the
corporations and/or individuals claiming the credit.
Potential Performance Measures - a listing of potential measures that might be used to evaluate each of the income
tax credits.
The reported information was obtained from a variety of sources. The JLBC Staff reviewed the statutes establishing
each of the credits, as well as the tax forms and instructions used by businesses and individuals to claim the credits.
The Staff also reviewed summaries and minutes of committee and subcommittee hearings that were held prior to
adoption of the credits. Various agencies were contacted, including DOR and the Arizona Commerce Authority.
HO:ac
Attachment
xc: Reed Spangler, Senior Policy Advisor, Senate
Jeff Winkler, Policy Advisor, Senate
Carolyn Speroni, Senate Finance Committee Analyst
Lorenzo Romero, Director of Fiscal Policy, House
Mark Bogart, Senior Economist/Policy Advisor, House
Stephanie Jaffa, House Ways and Means Committee Analyst
FAMILY INCOME TAX CREDIT
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Family Income Tax Credit
Summary
• The cost of the Family Income Tax Credit was an estimated $5.8 million in tax year 2011.
• The credit was claimed by 516,785 tax-filers at an average of $11 per claim.
• Average credit use is declining as other tax law changes have assisted low-income taxpayers.
• While labeled as a family tax credit, single households with no dependents are also eligible for the credit.
Statute
A.R.S. § 43-1073 (Individual Income Tax)
Description
This credit is provided to taxpayers below certain income levels. A taxpayer’s income limit depends on
both their filing status and the number of dependents claimed on their tax return.
The credit is currently $40 for each member of a household for whom a personal or dependent exemption is
allowed. However, the total amount of credit claimed cannot exceed $240 for married taxpayers filing joint
returns or for single persons filing as head of household. The credit is limited to $120 for singles and
married couples filing separate returns.
For taxpayers whose filing status is single or married filing separately, their Arizona adjusted gross income,
plus any amounts subtracted for non-personal exemptions, must be less than or equal to $10,000 to qualify
for the credit. For most taxpayers, this amount is the same as their federal adjusted gross income. The
income thresholds for other taxpayers are shown in Table 1 below.
Table 1
Income Limit By Filing Status
and Number of Dependents
Filing
Status
# of
Dependents
Income
Limit
MFJ1/ < 2 $20,000
MFJ 2 23,600
MFJ 3 27,300
MFJ ≥ 4 31,000
HOH2/ < 2 20,000
HOH 2 20,135
HOH 3 23,800
HOH 4 25,200
HOH ≥ 5 26,575
____________
1/ Married couples filing joint returns.
2/ Single persons filing as head of household.
Refundable
The credit is not refundable.
Carry Forward
No carry-forward of unused credits is allowed.
History and Rationale
This credit was created by Laws 1995, 1st Special Session, Chapter 9 (SB 1009) and became effective
retroactively from January 1, 1995. The credit was one of several tax provisions in SB 1009 that were
designed to reduce both property and individual income taxes by $(200) million annually. According to
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both House Ways and Means and Senate Finance Committee minutes from March 15, 1995, the credit was
intended to help reduce low-income households’ tax liability.
Laws 1998, 4th Special Session, Chapter 3 (SB 1007) increased the per-person credit from $30 to $40 and
expanded the application of the credit from 4 to 6 household members, as reflected in the table on the
previous page. As noted earlier, the maximum credit per taxpayer was increased from $120 to $240 for
married couples filing joint returns and for single persons filing as head of household, and from $60 to
$120 for all other taxpayers. The expansion of the family income tax credit was one of several provisions
contained in the “Tax Relief Act of 1998” that were designed to reduce individual income taxes by $(50)
million annually. (Note that both Laws 1995, Chapter 256 and Laws 1998, 5th Special Session, Chapter 2
provided minor technical changes to the family income tax credit.)
Revenue Impact
Based on preliminary data provided by the Department of Revenue (DOR), the cost of the credit was $5.8
million in 2011. Over the life of the credit, the cost has varied from a low of $4.6 million in 1997 to a high
of $7.9 million in 1999. There were a total of 516,800 credit claimants in 2011, or approximately 20% of
all residential filers. Credit use has been trending down gradually since 2000.
The family income credit will only reduce a taxpayer’s liability and any amount in excess of their liability
cannot be refunded or carried over to next tax year. This means that a taxpayer may only be able to use a
portion of the maximum credit available. The average credit available per taxpayer increased from $59 in
1997 to $88 in 1998 but has remained stable ever since. This increase was mainly attributable to a 1998 tax
law change, which raised the per-person family income tax credit from $30 to $40. The average credit used
(actual amount used to offset a taxpayer’s liability) was $11 in 2011. The data in Table 2 below, which was
provided by DOR, shows the annual impact of the family income tax credit.
Table 2
Family Income Tax Credit – Credit Claims by Tax Year
Tax Year # of Claimants
Total Credit
Available
Avg. Credit
Available Credit Used
Avg. Credit
Used
1995 340,844 $20,600,000 $60 $5,150,000 $15
1996 340,790 20,526,564 60 5,071,340 15
1997 345,223 20,483,252 59 4,637,593 13
1998 1/ 312,768 27,669,951 88 7,390,406 24
1999 327,974 28,374,663 87 7,925,721 24
2000 335,253 28,924,670 86 7,799,840 23
2001 402,094 33,377,585 83 7,356,939 18
2002 427,798 36,064,781 84 7,382,178 17
2003 417,451 35,068,208 84 7,445,937 18
2004 425,484 35,617,953 84 7,709,270 18
2005 439,056 36,737,292 84 7,661,867 17
2006 448,960 37,349,413 83 6,867,294 15
2007 518,820 42,706,477 82 6,784,150 13
2008 501,013 42,060,538 84 5,811,534 12
2009 515,867 44,711,520 87 5,270,319 10
2010 516,513 44,548,440 86 5,594,106 11
2011 516,785 44,268,240 86 5,817,731 11
_____________
1/ Laws 1998, 4th Special Session, Chapter 3 increased the per-person credit from $30 to $40.
# of Claimants – the number of taxpayers who claimed the credit in each year.
Total Credit Available – the total tax credits identified in each tax year.
Credit Used – the total value of credits claimed in each year.
Table 2 suggests that while the average available per-person credit has remained fairly stable over time
(approximately 2 persons claimed per taxpayer), the average credit used to offset actual tax payments has
declined significantly. For example, in the period between 1998 and 2011, the average credit used
decreased from $24 to $11 in comparison to a reduction from $88 to $86 for the average available credit.
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The decline of the average credit used is largely attributable to other tax law changes enacted after 1998,
such as a series of rate reductions and a new requirement that the standard deduction be adjusted for
inflation each year. These tax law changes have reduced the tax liability for all taxpayers, including low-income
earners. This means that a smaller fraction of a low-income earner’s available credit is now
required to reduce his liability to $0 than previously.
Economic Benefits
Measurable Economic Development
New Investments
Creation of New Jobs or Retention of Existing Jobs
This credit is not directly designed to promote economic development or spur new investments that would
result in new jobs. Instead, according to DOR’s August 2000 report “Income Tax Credits in Arizona,” the
family income tax credit is intended to alleviate the tax burden on low-income individuals. Two other
income tax credits provided by Arizona law – earned credit for property taxes (A.R.S. §43-1072) and the
Proposition 301 0.6% sales tax credit (A.R.S. §43-1072.01) – have the same objective. The property tax
credit is limited to senior citizens and recipients of Supplemental Security Income with a household income
below $5,501. Proposition 301 provided a $25 per-person credit for households with a federal adjusted
gross income of up to $25,000 and was intended to offset the cost to the taxpayer of a 0.6% sales tax
enacted in 2001. Unlike the family income tax credit, both the property tax and sales tax credit are
refundable.
The information above suggests that a taxpayer may be eligible for more than one of the 3 low-income tax
credits provided in statutes. For example, a single mother with two dependent children and an annual
income of $20,000 would qualify for a family income credit of $120 (of which about $45 would be used to
fully offset her tax liability) and a refundable Proposition 301 sales tax credit of $75.
Although the family income tax credit was not directly intended to promote economic growth, it may still
provide some economic benefits to society since it effectively increases the disposable income of low-income
households. A higher disposable income, all else equal, should have the effect of increasing
economic activity in the state somewhat. For the individual taxpayer, the credit may have the effect of
marginally increasing his spending on goods and services, which in the aggregate could result in the
creation of new jobs and increased investments in the state.
According to a recent study by the Center on Budget and Policy Priorities (“The Impact of State Income
Taxes on Low-Income Families in 2011”), two-parent families of four with incomes below the federal
poverty line ($23,018) are liable for state income taxes in 15 of the 42 states that levy such tax. The lowest
income level at which such families begin incurring state income tax liability (“threshold”) varies between
$12,500 (Montana) and $49,400 (California). With a threshold of $23,600, the report ranks Arizona 17th in
the nation. The average liability threshold for the nation as a whole is $27,545, or $4,527 above the federal
poverty line. (Note: the higher the rank, the higher the income threshold.)
Complexity
Unlike most other credits, the family income tax credit does not require a separate form to be appended to
the individual income tax return filed by the taxpayer. Instead, the income tax form instruction includes a
worksheet for the taxpayer to determine eligibility and the amount of the credit. According to DOR, this
worksheet is relatively easy to use since all the information that is necessary for the credit calculation is
included on the individual’s income tax form. For this reason, the credit requires no separate
administration or approval process by DOR.
Potential Performance Measures
There are no suggested performance measures.
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Prior Review
The credit was last reviewed by the Joint Legislative Income Tax Credit Review Committee in 2006. The
Committee recommended at that time that the credit be continued and placed on the 2011 review schedule
and be further amended to be adjusted for inflation each year. (The date was later moved back to 2012 due
to changes in the income tax credit review schedule enacted by Laws 2009, Chapter 32.)
A bill was introduced during the 2007 regular session (HB 2080) that would have provided for an annual
inflation-adjustment of the income thresholds to qualify for the credit. This bill, however, was never heard
in any committee.
COMMERCIAL AND INDUSTRIAL SOLAR ENERGY DEVICE
TAX CREDIT
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Commercial and Industrial Solar Energy Device Tax Credit
Summary
• The cost of the Commercial and Industrial Solar Energy Device Tax Credit was $129,500 for corporate
income tax filers in tax year 2010 and $51,400 for individual income tax filers in 2011.
• The credit was claimed by 12 corporate income tax taxpayers in 2010 at an average of $10,794 per claim.
• The credit was claimed by 17 individual income tax taxpayers in 2011 at an average of $3,023 per claim.
• While this credit is for the use of solar energy devices in commercial and industrial applications, the state
also offers separate residential solar tax credits.
Statute
A.R.S. § 43-1085 (Individual)
A.R.S. § 43-1164 (Corporate)
Description
The statutes provide individuals or corporations with an income tax credit for the installed cost of a solar
energy device used in their trade or business. Solar energy devices are defined in A.R.S. § 42-5001 as
systems or mechanisms that provide heating, cooling, electrical and mechanical power, daylighting, and
energy storage.
A taxpayer can claim a credit equal to 10% of the installed cost of a solar energy device used in their trade
or business. The credit cannot exceed $25,000 per building annually or $50,000 in total per business in any
year. The credit is available between tax years 2006 and 2018 and is capped at $1,000,000 per year. Tax
credits are authorized on a first come, first served basis as determined by the Arizona Commerce Authority.
The credit also may be transferred to a third party that manufactures or installs a qualifying device.
Refundable
The credit is not refundable.
Carry Forward
The unused portion of the credit may be carried forward for a maximum of 5 consecutive years.
History and Rationale
The federal government first introduced individual solar energy tax credits with the Energy Tax Act of
1978. Arizona created its first solar energy tax credit in 1979. The federal tax credit expired in 1985 and
Arizona’s tax credit expired in 1987. The Energy Policy Act of 2005 established federal tax credits of 30%
of expenditures on qualified residential, commercial, and industrial solar energy devices. The Energy
Improvement and Extension Act of 2008 extended these credits for solar devices purchased before
December 31, 2016 and removed all federal credit caps.
Arizona’s commercial and industrial solar energy device tax credit was signed into law in June 2006 (Laws
2006, Chapter 333) and became effective for the 2006 tax year. Laws 2010, Chapter 294 extended the tax
credits expiration date from December 31, 2012 to December 31, 2018. Chapter 333 included language
stating the purpose of the credit is “to stimulate the production and use of solar energy in commercial and
industrial applications in this state.”
The credit creates an incentive to purchase solar energy systems by reducing the cost. Since its creation in
2006, the credit has been used mostly to purchase photovoltaic (PV) solar energy devices. Electric utility
companies in the state also offer customer rebate programs in order to meet either regulatory or self-imposed
standards for renewable energy generation. In combination with the state tax credit, the cost of a
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solar PV system can be reduced by approximately 20%. When also factoring in federal tax credits, the cost
can be reduced by approximately 50%. However, investment in solar energy devices may become more
costly in future years as some utilities phase out their rebate programs.
The state also provides tax credits to reduce installation costs of residential solar energy devices.
Individual filers can receive a credit equal to 25% of the cost of installing a solar energy device at their
residence, up to maximum of $1,000. According to the Corporation Commission, this credit was
historically used to purchase solar water heaters and daylighting systems, but in recent years has
increasingly been used to purchase solar PV systems. Individuals and corporations can also receive a tax
credit of up to $75 for installing residential 1) solar water heater plumbing stub outs, or 2) electric vehicle
recharge outlets. An individual filer can combine the two credits for a maximum of $1,075 for the
residential installation of stub outs and a solar water heater system. The credits may not be combined
though, with the Commercial and Industrial Solar Energy Device Tax Credit.
Revenue Impact
Corporate
The cost of the credit used by corporate taxpayers was $129,528 in 2010, according to preliminary
estimates. Table 1 summarizes the corporate income tax impacts of this credit, as reported by the Arizona
Department of Revenue.
Individual
The cost of the credit used by individual taxpayers was $51,384 in 2011, according to preliminary
estimates. Table 2 summarizes the individual income tax impacts of this credit, as reported by the Arizona
Department of Revenue.
Table 1
Commercial Solar Energy Device Credit – Corporate Credit Claims by Tax Year
Tax Year
# of
Claimants
Total Credit
Available Credit Used Carry Forward
2006 x x x x
2007 x x x x
2008 7 85,550 74,899 10,651
2009 10 202,692 87,118 115,574
2010 12 194,824 129,528 65,296
__________
# of Claimants – the number of taxpayers who claimed the credit in each year.
Total Credit Available – the total tax credits identified in each tax year, including any new credits and any
credits carried over from a previous year and identified in that year.
Credit Used– the total value of credits claimed in each year.
Carry Forward– the total credit identified but not used in each year. The full carry forward may not be
reflected in the following year's estimate. For example, an individual could have $500 in credit identified in
tax year 2008, use $400 of it in 2008 (leaving $100 as a carry forward). If that individual did not identify or
claim that credit in 2009, that $100 carry forward could not be included in the carry forward total for 2009.
x — No data released by the Department of Revenue.
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Economic Benefits
Measurable Economic Development
New Investments
Creation of New Jobs or Retention of Existing Jobs
There are no studies of the magnitude of economic development, new investment, or the creation or
retention of jobs related to this specific credit. The credit was applied against the purchase of
approximately $7.5 million of solar devices in 2010 (this is the last year of data available for both
individual and corporate tax credit use). This level of purchase likely had some positive impact on the
industry, but it is difficult to know whether the same level of devices would have been purchased without a
10% discount provided by the credit. Investment in solar energy equipment has increased in recent years,
though this occurred while use of the tax credit remained well below the $1,000,000 annual cap. While
there is a lack of economic impact data on this credit, Arizona’s total solar-related employment has
increased from 3,800 in 2010 to 4,800 in 2011 (approximately 25%), according to a study by the Solar
Foundation.
Complexity
The solar energy device credit does not appear to be unusually complex in terms of its application,
administration, and approval process. The $1,000,000 cap could add complexity, but credit use is not close
to that level yet.
Potential Performance Measures
Performance measures could include:
1. Total megawatt hours of electricity generated from solar energy devices.
2. Total megawatt hours of electricity conserved from non-renewable energy sources.
3. Number of persons employed in businesses that manufacture, install or service solar energy devices.
Table 2
Commercial Solar Energy Device Credit – Individual Credit Claims by Tax Year
Tax Year
# of
Claimants
Total Credit
Available Credit Used Carry Forward
2006 5 $27,507 $18,086 $9,421
2007 15 75,549 54,558 20,991
2008 53 428,724 279,874 148,850
2009 81 549,543 325,054 224,489
2010 46 471,117 257,980 213,137
2011 17 157,080 51,384 105,696
_________
# of Claimants – the number of taxpayers who claimed the credit in each year.
Total Credit Available – the total tax credits identified in each tax year, including any new credits and any
credits carried over from a previous year and identified in that year.
Credit Used– the total value of credits claimed in each year.
Carry Forward– the total credit identified but not used in each year. The full carry forward may not be
reflected in the following year's estimate. For example, an individual could have $500 in credit identified
in tax year 2008, use $400 of it in 2008 (leaving $100 as a carry forward). If that individual did not
identify or claim that credit in 2009, that $100 carry forward could not be included in the carry forward
total for 2009.
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The statute does not impose any requirements related to these measures. Arizona Public Service Co. (APS)
and UniSource (Tucson Electric Power and Citizens Utilities) measure and report the amount of solar
electricity generated in their service territories to the Arizona Corporation Commission on a regular basis.
Salt River Project publicly reports similar information. However, the amount of energy saved by other
solar energy devices, including water heaters, can only be estimated, and requiring this information would
create an additional reporting burden.
A previously mentioned study found that Arizona employs 4,800 people in a range of solar-related jobs,
which is third most of any state. The Solar Foundation, a non-profit organization that promotes use of solar
technologies, produces an annual report that estimates the sector’s employment in each state. Jobs
measured in the study though, also include residential solar sector employment. A limitation of using Solar
Foundation job estimates as a performance measure therefore, is that they may also be impacted by the
other state and federal solar tax credits.
Prior Review
The credit has not been reviewed by the committee before.
DONATION TO THE MILITARY FAMILY RELIEF FUND
TAX CREDIT
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Donation to the Military Family Relief Fund Tax Credit
Summary
• The cost of the Donation to the Military Family Relief Fund (MFRF) Individual Income Tax Credit was
$996,700 in tax year 2011.
• The credit was claimed by 3,007 taxpayers in tax year 2011 at an average of $331 per claim.
• The credit is available only to individuals, not to business entities, filing an individual income tax form.
Statute
A.R.S. § 43-1086 (Individual)
Description
The statute provides individuals an income tax credit for cash donations to the MFRF. The fund helps
deployed or veteran service members and their families faced with financial hardship. The Arizona
Department of Veterans Services (DVS) receives donations and administers the fund established by Laws
2007, Chapter 258.
Taxpayers can claim a credit up to $200 if filing as single or head of household and $400 for those filing as
a married couple. The credit is available between tax years 2008 and 2018 and is capped at $1,000,000 per
year. The credit may not be transferred to a third party.
Refundable
The credit is not refundable.
Carry Forward
No carry-forward of unused credits is allowed.
History and Rationale
Though no specific federal tax credit exists for military-focused donations, taxpayers can deduct charitable
contributions to military non-profit organizations from their federal adjusted gross income. The War
Revenue Act of 1917 first allowed these deductions of charitable donations. Today, federal tax filers can
deduct the entire donation amount, up to 30% of their adjusted gross income for cash donations and 20%
for property.
Arizona’s Donations to the MFRF tax credit was signed into law in June 2007 (Laws 2007, Chapter 258)
and became effective for the 2008 tax year. Laws 2012, Chapter 281 extended the tax credit’s expiration
date from December 31, 2012 to December 31, 2018. Since the credit became available to taxpayers in
2008, it has been used nearly to its full $1,000,000 annual cap each year.
Laws 2007, Chapter 258 states that the purpose of the credit is to “encourage contributions for the
compassionate relief of military widows, widowers, spouses and minor children of military personnel in
this state who were killed or wounded in the line of duty” after September 11, 2001. Laws 2010, Chapter
254 extended eligibility for grants made from cash donations to families of all military personnel deployed
to a combat zone since September 11, 2001 who are experiencing financial hardship. Financial assistance
applications of up to $20,000 are evaluated by the Governor-appointed Military Family Relief Advisory
Committee.
Revenue Impact
The preliminary cost of the credit in 2011 was $996,695. Table 1 summarizes the individual income tax
impacts of this credit, as reported by the Arizona Department of Revenue (DOR).
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Economic Benefits
Measurable Economic Development
New Investments
Creation of New Jobs or Retention of Existing Jobs
This credit is not directly designed to promote economic development or spur new investments that would
result in new jobs. The credit may still provide some economic benefits, since the additional donations
raise the disposable income of grantee families under financial hardship. The economic impact would be
small however, since the credit can only be claimed up to $1,000,000 each year. In FY 2012, $562,100 in
grants were made to families from donations to the MFRF (see Table 2). Donation amounts that are not
used for grant making remain in the MFRF until December 31, 2018. After this date, any remaining fund
balance will be transferred to the Veterans’ Donations Fund. The MFRF had a balance of $3,151,200 at the
end of FY 2012.
Complexity
The credit is not entirely simple to administer since, once the $1,000,000 cap is reached, DVS physically
mails back subsequent contributions. Donations in 2009 and 2010 exceeded $1,000,000 (see Table 3) as
some donors contributed more than the $200 or $400 maximum eligible for a credit. Laws 2007, Chapter
258 permit the Military Family Relief Advisory Committee to use up to 5% of donations for the costs of
administering the financial assistance program. While donations to the MFRF have historically exceeded
grants (see Tables 2 and 3), the annual difference between the two has decreased since Laws 2010, Chapter
254 expanded eligibility criteria for grant applicants.
Table 1
Military Family Relief Fund Credit – Credit Claims by Tax Year
Tax
Year
# of
Claimants
Total Credit
Available Credit Used Carry Forward
2008 3,070 $982,575 $982,575 $0
2009 3,185 998,331 998,331 0
2010 3,052 995,849 995,849 0
2011 3,007 996,695 996,695 0
________
# of Claimants – the number of taxpayers who claimed the credit in each year.
Total Credit Available – the total tax credits identified in each tax year, including any new credits and
any credits carried over from a previous year and identified in that year.
Credit Used – the total value of credits claimed in each year.
Carry Forward – This tax credit may not be carried forward.
Table 2
Grants from the MFRF
Fiscal
Year
Total
Grants
2009 $11,600
2010 126,600
2011 233,400
2012 562,100
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Potential Performance Measures
Performance measures could include:
1. Number and dollar amount of donations made to the Military Family Relief Fund.
2. Number and dollar amount of grants made from the Military Family Relief Fund to military families.
The statute does not impose any requirements related to these measures. DOR provides data on donations
to the fund in their annual Credit History report and DVS provides grant data in their annual budget
request.
Prior Review
The credit has not been reviewed by the committee before.
Table 3
Donations to the MFRF
Tax
Year
# of
Donations
Total
Donations
2008 3,130 $993,132
2009 3,259 1,004,775
2010 3,128 1,000,384
2011 3,093 999,296
PRIVATE SCHOOL TUITION ORGANIZATION TAX CREDIT
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Private School Tuition Organization (“Private School STO-1”) Tax Credit
Summary
• Current law authorizes two tax credits for contributions that individuals make to school tuition organizations
(STOs). This review pertains only to the “original” Private School STO tax credit (“private school STO-1”)
authorized by A.R.S § 43-1089. The second credit (“private school STO-2”) was recently established by Laws
2012, Chapter 4 (A.R.S § 43-1089.03) and is not yet subject to review.
• Approximately 63,000 individuals claimed $43.2 million in credits for contributions to 53 different STOs under
“private school STO-1” in calendar year (CY) 2010 (latest available data).
• The maximum tax credit allowed in CY 2010 was $500 for single filers and $1,000 for married couples filing
jointly. Those maximums are now adjusted annually for inflation and for CY 2012 will be $503 and $1,006,
respectively.
• The credit results in foregone General Fund costs to the extent that STO-funded scholarships result in students
not attending public school. To offset the current $43.2 million level of tax credits under private school STO-1,
approximately 8,150 students would have to be diverted from public school due to STO scholarships (8,150
students X $5,300 statewide average savings per public school student = $43.2 million).
Statute
A.R.S. § 43-1089.
Description
This credit is provided to individuals for voluntary contributions to STOs. A STO is defined as a charitable
organization that is exempt from federal taxation and that allocates at least 90% of its tax credit-eligible revenue for
educational scholarships or tuition grants to children to attend non-governmental elementary or secondary schools.
A STO may use up to 10% of tax credit-eligible contributions for administration expenses. The “90% for
scholarships” restriction does not apply to STO revenues (if any) that are not linked to tax credits, such as interest
earnings or employer matching contributions.
The “private school STO-1” tax credit is not allowed if the taxpayer designates the taxpayer's contribution to the
STO for the direct benefit of any dependent of the taxpayer or if the taxpayer designates a student beneficiary as a
condition of the taxpayer's contribution to the STO. The tax credit is not allowed if the taxpayer, with the intent to
benefit the taxpayer's dependent, agrees with one or more other taxpayers to designate each taxpayer's contribution
to the school tuition organization for the direct benefit of the other taxpayer's dependent. A STO cannot award,
restrict or reserve scholarships solely on the basis of a donor's recommendation. If a STO scholarship exceeds a
school's total cost of educating the recipient, the school must return the excess portion to the STO.
Refundable
The credit is not refundable.
Carry Forward
The unused portion of the credit may be carried forward for a maximum of 5 consecutive years.
Transferable
The credit is not transferable.
History and Rationale
The “private school STO-1” tax credit was created by Laws 1997, Chapter 48 and became effective January 1, 1998.
Chapter 48 also established the public school extracurricular activity fee tax credit.
- 18 -
The program has been subject to litigation. In Kotterman v. Killian (September 1997), opponents of the tax credit
challenged its constitutionality in state court, claiming that it violated both federal and state prohibitions against
using public monies to support a religious establishment, and a state prohibition against using public monies for
private or sectarian schools. The Arizona Supreme Court upheld the tax credit in January 1999, ruling that STOs
scholarship monies never enter into the state’s control or reach the State Treasury. In Winn v. Hibbs (February
2000) opponents filed a challenge to the program in federal court. In April 2011, the U.S. Supreme Court upheld the
program, ruling that the plaintiffs did not have legal standing to challenge it.
As originally enacted, the maximum credit allowed under “private school STO-1” was $500. Laws 2000, Chapter 1,
5th Special Session increased the cap to $625 for married taxpayers filing a joint return. Laws 2005, Chapter 334
increased the maximum credit for married couples filing jointly from $625 to $825 for taxable year 2005 and to
$1,000 for taxable year 2006 and thereafter. Chapter 334 left the maximum credit for single individuals and heads
of households unchanged at $500. Laws 2010, Chapter 293 requires annual inflation adjustments to the maximum
credit amounts. For CY 2012, the inflation-adjusted maximums will be $503 and $1,006, respectively.
Laws 2012, Chapter 4 establishes a second private school STO tax credit (“private school STO-2”) starting in tax
year 2012 pursuant to A.R.S § 43-1089.03. The new credit is allowed only after the taxpayer has used the maximum
credit available under "private school STO-1." “Private school STO-2" scholarships may only be awarded to public
school transfers, kindergarteners, preschool disabled students, military dependents, or pupils who received a
corporate STO or "private school STO-2" scholarship in the prior year, which are restrictions that do not apply to
“private school STO-1”.
“Private school STO-1” and “private school STO-2” are tax credits for individuals. Corporations and insurers also
may receive tax credits for contributions to STOs under separately-authorized programs. The corporate STO tax
credits are not subject to Committee review this year. Attachment 1 provides an overview of all current STO tax
credit programs.
The statute creating the “private school STO-1” tax credit does not include a specific statement of purpose or a
rationale. Minutes from committee meetings indicate supporters were seeking to provide more educational
opportunities for children from low-income families.
Revenue Impact
Table 1 summarizes individual contributions to STOs under “private school STO-1” since the inception of the
program in CY 1998, as reported by the Arizona Department of Revenue. In CY 2010 (the most recent calendar
year data) 62,941 individuals donated a total of $43.2 million to STOs under the program.
Table 1
Individual Contributions to School Tuition Organizations for “Private STO-1”
Calendar Year 1/ # of STOs # of Donations Amount % Change
1998 16 4,248 $ 1,815,800
1999 33 32,023 13,781,300
2000 36 38,249 17,701,300 28.4
2001 43 46,696 24,897,400 40.7
2002 43 52,203 26,512,700 6.5
2003 51 58,122 29,445,600 11.1
2004 53 63,830 31,846,500 8.2
2005 53 69,239 42,196,200 32.5
2006 56 73,617 51,012,326 20.9
2007 55 76,065 54,305,000 6.5
2008 55 78,434 55,260,700 1.8
2009 54 73,430 50,879,200 (7.9)
2010 53 62,941 43,183,500 (15.1)
_____________
1/ STOs historically have reported data on a calendar year basis, but are required to report on a fiscal year basis starting in FY 2011. As a
result, the most recent DOR report for “private school STO-1” includes a mix of current year (CY 2010) and fiscal year (FY 2011) data.
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The credit results in foregone General Fund costs to the extent that STO-funded scholarships result in students not
attending public school. Currently each pupil added to the statewide K-12 Average Daily Membership (ADM)
count costs the state General Fund about $5,300, on average. The state General Fund, therefore, saves an average of
$5,300 for each “private school STO-1” scholarship recipient who otherwise would attend public school. This
implies that the program has no net General Fund cost if at least 8,150 students would have otherwise attended
public schools in the absence of “private school STO-1” scholarships ($43.2 million in credits used in TY 2010 ÷
$5,300 state savings per pupil ≈ 8,150 students). The actual number of students in this category is unknown.
Beyond its impact on K-12 operating costs, the credit could result in lower School Facilities Board (SFB) costs for
new school construction and building renewal. New school construction costs would be reduced if the SFB
approved fewer new schools because of lower public school enrollment growth from the credit. This would reduce
SFB building renewal costs as well because fewer school buildings would require funding under that formula. The
amount of SFB “foregone costs” due to the credit is unknown. In addition, there has been little SFB-funded new
school construction in recent years due to slow population growth and the SFB building renewal formula has been
replaced by a significantly smaller program.
Economic Benefits
This credit is not directly designed to promote economic development or spur new investments that would result in
new jobs. Instead, according to DOR’s August 2000 report “Income Tax Credits in Arizona,” this credit is one of
several tax credits in statutes primarily intended to encourage cash contributions to certain target groups in society,
such as the working poor or students in private or public schools.
Attachment 2 (from the FY 2011 DOR School Tax Credit Report) provides information on contributions received
and scholarships awarded by each STO under “private school STO-1” for FY 2011. In that year, a total of $51.4
million was received. (Note: Attachment 2 is reported on a fiscal year basis, whereas Table 1 above is reported on a
calendar year basis, so covers a different 12-month period.) Ten STOs that received more than $1 million in
contributions in FY 2011 accounted for $41.1 million, or about 80%, of total revenues for that year.
STOs distributed $47.1 million of the $51.4 million received in donations in CY 2011 (see Attachment 2).
Remaining donation revenues were either allocated for administrative costs or retained for future year awards.
Historical data on scholarships and grants on a calendar year basis are summarized in Table 2 below.
Table 2
Scholarship Data for “Private School STO-1”
Calendar Year Total $ Awarded # of Scholarships Average Scholarship
1998 $ 103,800 128 $ 811
1999 2,193,700 3,207 684
2000 13,562,000 15,081 899
2001 16,485,000 18,049 913
2002 22,826,700 19,582 1,166
2003 24,420,100 20,134 1,213
2004 28,025,100 21,146 1,325
2005 30,863,200 22,529 1,370
2006 40,595,000 24,678 1,645
2007 48,561,700 27,153 1,788
2008 54,205,400 28,326 1,914
2009 52,127,300 27,592 1,889
2010 47,344,400 26,433 1,791
The total number of awards distributed under the program has increased from 128 in 1998, the first year the credit
was offered, to a peak of 28,326 in 2008 (see Table 2). In the most recent year (2010), 26,433 scholarships were
awarded, which was (1,893) fewer or (7)% less than the FY 2008 peak. The average scholarship likewise peaked in
2008 at $1,914 and has since declined to $1,791, or $(123) and (6.4)% below the 2008 level.
- 20 -
DOR notes in its annual report that a “many families seek scholarships from multiple STOs, resulting in one child
being counted several times in the scholarship counts.” As a result, the number of scholarships reported in Table 2
does not equate to the number of students receiving scholarships. Past analysis on this topic suggests that the
number of individual students receiving STO scholarships is roughly equal to 90% of the total number of
scholarships awarded. For 2010 this would equate to approximately 23,800 individual students receiving “private
school STO-1” scholarships (26,433 total scholarships X 90% unduplicated = 23,800 individual recipients).
Private schools enrolled an estimated 44,559 students in FY 2010 under most recent estimates from the National
Center on Education Statistics (NCES), which is the federal clearinghouse for education data. This represented
4.1% of Arizona’s total K-12 population in FY 2010. With an estimated 23,800 individual private school students
receiving an award (see above), the JLBC Staff estimates that 53% of private school students receives a scholarship
under “private school STO-1” in 2010 (23,800 estimated recipients ÷ 44,559 estimated private school students =
53%).
Historical data on private and public school enrollment is summarized in Table 3.
Table 3
Private and Public School Enrollment
FY 2000 FY 2002 FY 2004 FY 2006 FY 2008 FY 2010
FY 00 - 10
Growth
Private School Enrollment 1/ 44,060 44,360 46,366 50,013 51,590 44,559 1.1%
Public School Enrollment 2/ 840,130 879,106 933,734 998,221 1,044,785 1,051,767 25.2%
____________
1/ Data from the National Center for Education Statistics: Private School Universe Survey
2/ Data from the Arizona Department of Education: Annual Report
As indicated in Table 3, Arizona’s private school enrollment grew from 44,060 students in FY 2000 to 44,559
students in FY 2010, which was an increase of 499 students, or 1.1%. Table 3, however, shows relatively strong
private school growth through FY 2008 (up by 7,530 students, or 17%) followed by a steep decline (-7,031 students,
or - 3.6%) between FY 2008 and FY 2010. The steep decline after FY 2008 may have been influenced by the Great
Recession, declining contributions and average scholarships amounts under “private school STO-1” after FY 2008
(see Tables 1 & 2), and continuing growth in charter school options for school-age children.
The NCES reports an average K-12 private school tuition cost of $8,549 for all states and grade levels combined in
its most recent (FY 2008) private school survey. With an average scholarship of $1,914 in 2008 under “private
school STO-1” (see Table 2), the average scholarship would have covered 22.4% of private school tuition costs that
year.
Complexity
DOR indicates that it is administratively simple for individuals to donate to STOs and claim the credit. DOR notes,
however, that receiving donations is now significantly more complex for STOs, in that they must ask every donor if
they have given to another STO in the fiscal year, and, if so, how much and, if so, which tax year they will be
applying it against (because of the ability to give a donation until April 15 and count it against the prior tax year).
This is necessary because of the new income tax credit authorized by Laws 2012, Chapter 4, which establishes
specific criteria for how money generated by the new credit can be used for scholarships. DOR also indicates that
the annual reporting process for donations is time-consuming for both STOs and DOR because of the sheer number
of STOs and the fact that most STOs are staffed by volunteers, which leads to reporting inconsistencies and makes it
difficult for DOR to educate STO staff on reporting requirements. In addition, DOR describes its oversight
responsibilities over STOs as a "daunting task" that has not yet been fully accomplished and which has been affected
by changing statutory requirements.
- 21 -
Potential Performance Measures
Performance measures could include:
1. Percentage of STO revenues retained for administrative costs.
The STOs would have this information readily available.
2. Percentage of private school tuition paid with award funding.
This information appears to be collected by STOs, but would require additional reporting.
Prior Review
The credit was last reviewed by the Joint Legislative Income Tax Credit Review Committee in 2006. The
Committee recommended at that time that the credit be continued and placed on the 2011 review schedule. This date
was later moved back to 2012 due to changes in the income tax credit review schedule enacted by Laws 2009,
Chapter 32
PUBLIC SCHOOL EXTRACURRICULAR ACTIVITY FEE
TAX CREDIT
- 23 -
Public School Extracurricular Activity Fee Tax Credit
Summary
• In Calendar Year (CY) 2011, the Public School Extracurricular Activity Fee Tax Credit was
claimed by 250,210 taxpayers. The total dollar value of the credit was $48.4 million, distributed
as follows:
o School districts – $42.0 million
o Charter schools – $6.4 million
• The average CY 2011 contribution was $194
o School districts – $186
o Charter schools – $262
o Total number of contributions – 250,210
• The average CY 2011 contribution per pupil was $46 (factored over all public school pupils
statewide)
o School districts – $45
o Charter schools – $54
• Eleven districts received more than $1 million each and accounted for $25.4 million (52%) of the
total.
• School districts with higher family income levels tended to receive higher average contributions
per pupil. Other factors affecting contribution levels could include:
o District administration
o Community involvement
Statutes
A.R.S. § 43-1089.01 (Individual Income Tax)
Description
This credit is provided to taxpayers for any fees or contributions made to a K-12 public school in support of
extracurricular activities or character education programs. School districts are not allowed to use any
portion of contribution revenues for program administration. Laws 2011, Chapter 195, however, permits
schools to use up to 50% of unencumbered contributions from 2010 and prior years on “short-term capital”.
Extracurricular activities are defined in statute as “school sponsored activities that require enrolled students
to pay a fee in order to participate.” The definition includes, but is not limited to, the following list of
items:
• Band uniforms;
• Equipment or uniforms for varsity athletics;
• Scientific laboratory materials; and
• In-state or out-of-state trips that are solely for competitive events.
Excluded from the definition of extracurricular activities are senior trips or events that are recreational,
amusement or tourist activities.
Regarding character education, A.R.S. § 15-719 specifies that a character education program must include
the following components:
• Instruction in the definition and application of at least 6 character traits;
• Activities, discussions and presentations on the application of the character traits; and
• Presentations by teachers or mentors who demonstrate the character traits.
- 24 -
Refundable
The credit is not refundable.
Carry Forward
The unused portion of the credit may be carried forward for a maximum of 5 consecutive years.
History and Rationale
The public school extracurricular activity fee tax credit was created by Laws 1997, Chapter 48 and became
effective January 1, 1998. The credit was added as an amendment in the Senate Education Committee to a
bill (HB 2074), which already contained provisions to establish a private school tuition organization tax
credit. In its final form, therefore, Chapter 48 created both the public school extracurricular activity fee tax
credit and the private school tuition organization tax credit.
As originally enacted, the maximum credit allowed was $200. Laws 2000, Chapter 1, 5th Special Session
increased the cap to $250 for married taxpayers filing a joint return. Laws 2005, Chapter 334 increased the
maximum credit for married couples filing jointly from $250 to $300 for taxable year 2005 and to $400 for
taxable year 2006 and thereafter. The maximum credit for single individuals and heads of households was
left unchanged at $200.
The credit did not initially contain a provision allowing a claim for contributions to character education
programs. These programs were added with the passage of Laws 2000, Chapter 313.
The statute creating the tax credit does not include a specific statement of purpose or a rationale.
According to a March 2002 Arizona State University Education Policy Studies Laboratory Report, the
credit was added to HB 2074 as a compromise to opponents of the original legislation. The likely intent is
to assist parents with the cost of extracurricular activities.
Revenue Impact
For Tax Year 2011, the Arizona Department of Revenue (DOR) reports that public schools received $48.4
million in extracurricular fees and contributions and that 250,210 individuals claimed $48.4 million in
related tax credits. Historical data on contributions and credits under the program are summarized in the
table below.
Table 1
Public School Extracurricular Activity Fee Tax Credit Contributions
Calendar Year
# of
Fees/Contributions $ Received
Average
Fee/Contribution
1998 74,242 $ 8,983,300 $121
1999 109,748 14,816,000 135
2000 149,215 17,458,200 117
2001 166,468 19,976,200 120
2002 143,697 22,416,700 156
2003 201,407 27,753,800 138
2004 213,987 30,958,900 145
2005 215,369 35,416,300 164
2006 218,664 43,230,433 198
2007 214,356 44,069,900 206
2008 233,450 45,164,400 193
2009 239,031 42,657,100 178
2010 250,004 43,718,700 175
2011 250,210 48,443,500 194
- 25 -
Table 1 shows that total fees and contributions have increased from $9.0 million in 1998, the first year the
credit was offered, to $48.4 million in 2011. The average contribution also has increased, from $121 in
1998 to $194 in 2011. The largest one-year growth occurred in 2006, which is when the maximum credit
increased to its current level of $400 for married couples filing jointly. Thereafter total fees and
contributions remained at roughly $44 million per year until 2011 (the most recently reported year), when
they increased to $48.4 million (10.8% growth). Laws pertaining to the program (including the maximum
allowed credit) were essentially unchanged for 2011, so the 10.8% growth observed for the year may have
been due to an improving economy.
DOR’s annual reports on “Arizona Income Tax Credits” assume that the amount of tax credits claimed by
individuals under the program in any given year equals total available credits. The revenue impact of the
program can not be determined with certainty; however, as an individual tax filer could claim a tax credit of
more or less than the amount of their current year public school fees and contributions under certain
circumstances. A filer would have to claim less than their total fees and contributions, for example, if it
exceeded the maximum allowable tax credit for the year. They would claim more than their current year
fees and contributions if their claim also included carry-forward credits from any of the past 5 years.
Laws 2011, Chapter 195 allows public schools to use up to 50% of unencumbered extracurricular program
fees and contributions received prior to FY 2011 to purchase “short term capital items,” such as textbooks
and equipment. Chapter 195 requires public schools to report such expenditures to the JLBC at the end of
each fiscal year. For FY 2012, 45 school districts and charter schools reported $1.6 million in short-term
capital expenditures under Chapter 195. The total includes $752,600 for technology (47%), $462,400 for
furniture and equipment (29%), $211,800 for instructional aids (13%), $143,700 for textbooks (9%) and
$42,700 for library resources (3%). Reporting districts and charters also indicate that they collectively had
approximately $7.1 million in total unencumbered pre-FY 2011 “tax credit” contributions available as of
July 1, 2011, which was the first day of the reporting period for FY 2012.
School districts are not allowed to use revenues generated from contributions for program administration.
The Arizona Association of School Business Officials (AASBO) has indicated that authorizing districts to
use 5-10% of revenues for administration might benefit some districts with the costs of running these
programs.
Economic Benefits
Measurable Economic Development
New Investments
Creation of New Jobs or Retention of Existing Jobs
This credit is not directly designed to promote economic development or spur new investments that would
result in new jobs. Instead, according to DOR’s August 2000 report “Income Tax Credits in Arizona,” this
credit is one of several tax credits in statute that are primarily intended to encourage cash contributions to
certain target groups in society, such as the working poor or students in private or public schools.
The $48.4 million in extracurricular fees and contributions reported for 2011 includes $42.0 million to
school districts and $6.4 million to charter schools. Eleven districts generated over $1 million each and
accounted for $25.4 million (52%) of total revenues (see Attachment 1). Twelve charter schools collected
over $100,000 each. Twenty districts and 74 charters did not report or reported receiving no contributions.
Contributions to school districts ranged from $0 to $284 per pupil in 2011, with an average per pupil
contribution of $45 ($42 million district total ÷ 929,700 grand total district Average Daily Membership
[ADM] pupils = $45). Charter contributions ranged from $0 to $390 per pupil in 2011 (for charters with at
least $100,000 in program revenues), with an average contribution of $54 per student ($6.4 million charter
total ÷ 119,700 grand total charter ADM = $54).
- 26 -
Attachments 1 & 2 rank school districts by total dollars received and dollars received per pupil. Attachment
1 shows that the largest school districts in the state tend to receive the most extracurricular fees and
contributions. The 2 largest school districts in the state, Mesa Unified and Tucson Unified, for example,
ranked 1 & 2, respectively, in total contributions and fees. Attachment 2, however, shows that small to
medium size districts tend to report higher average fees and contributions per pupil. Prescott Unified, for
example, (a medium size district) reported an average of $261 per ADM versus $97 and $59 for Mesa
Unified and Tucson Unified, respectively.
Attachments 1 & 2 also show each school district’s participation rate in the Federal School Lunch Program
in FY 2011. School district free or reduced price lunch data is often used as an indicator of average family
income levels in a community. For FY 2011, a child from a family of 4 qualified for a free school lunch if
their family had an annual income of $28,665 or less. They qualified for a reduced price lunch if their
household income was $40,793 or less. For FY 2011, 56.9% of public school students statewide qualified
for free or reduced price school lunches.
Comparing contributions per student with data on the percent of students eligible for a free or reduced price
lunch, a statistical analysis of the data revealed that school districts with a lower percentage of free or
reduced price lunch students generated a higher level of contributions per student and vice versa. Districts
with lower than average (56.9%) participation in the free or reduced price lunch program received an
average contribution of $65 per pupil in 2011, while districts with above average participation received an
average of $23 per student. (Charter schools were not analyzed in a similar manner as free or reduced price
lunch eligibility information was available for only a limited number of charters.)
While the above analysis demonstrated that a relationship between family income and contribution levels
exists, a further examination of the data established that the size of the district impacted the strength of this
relationship. In larger school districts with over 1,000 students, the relationship was much more
pronounced, meaning that income levels played a greater role in determining contributions in those
districts. The relationship was weaker in smaller school districts with 1,000 students or less, indicating that
income levels only had a slight impact on contribution rates in those districts.
Since family income levels only minimally affected contribution rates in smaller districts, and accounted
for some, but not all, of the difference in contributions in larger districts, there must be other factors that
impact contribution levels. Although there is no data available to evaluate the impact of other factors, one
such factor could include the ability of the school district administration to advertise the credit and make it
accessible to potential contributors. For example, a quick survey of certain school districts showed that
while most districts appear to advertise the credit on their web site and include a printable contribution
form, some districts do not. Another factor that might impact contribution levels is the community’s
involvement in its school system. Community involvement could include volunteer organizations, such as
the Parent Teacher Association.
Complexity
DOR indicates that the public school extracurricular activity tax credit has become more difficult to
administer since 2006 due to recent statutory changes. A.R.S. § 43-1089.01 now requires a public school
to report how the tax credit money was spent categorized by specific extracurricular activity or character
education program (see Table 2 below). It also now permits school districts to temporarily use up to 50%
of the unencumbered contributions received on or before December 31, 2010 for short term capital items
and requires participating districts to report such expenditures to the JLBC (see Table 3 below). These
changes have substantially increased data collection and reporting responsibilities for public schools and
DOR in administering the tax credit program. DOR notes that the new requirement that schools report how
they spent tax credit monies "(has) provided valuable feedback and an opportunity to contact schools that
might need additional assistance in determining if an activity is eligible for the tax credit."
- 27 -
Table 2
Extracurricular Fee Funding by Category of Activity (CY 2011)
Description $ Spent % of Total
Athletics or Sports $12,183,076 26.7%
Field Trips 9,523,140 20.9%
Other Clubs 5,808,870 12.7%
After School Enrichment 3,587,883 7.9%
Fine Arts 2,360,882 5.2%
Band 2,122,509 4.7%
Extended Day or After School Program 2,051,457 4.5%
Extended Kindergarten Enrichment 1,470,306 3.2%
Character Education 1,064,697 2.3%
Music 1,042,972 2.3%
Short-Term Capital Items (Laws 2011, Ch 195) 1/ 848,764 1.9%
Non-Credit Summer Program 662,115 1.5%
Performing Arts, Drama Club, or Dance Club 625,007 1.4%
Choir 603,308 1.3%
Tutoring 525,519 1.2%
Academic Competitions, Chess Club, Speech & Debate 358,042 0.8%
Pending Requests for Extracurricular Activity 347,855 0.8%
Orchestra 294,615 0.6%
Driver Education or Behind the Wheel Program 155,367 0.3%
Total $45,636,385 100.0%
____________
1/ Total reported separately to JLBC for FY 2011 rather than CY 2011 was approximately $1.6
million (see Table 3).
Table 3
Short-Term Capital Purchases (FY 2011)
Description $ Spent % of Total
Technology $752,575 46.7%
Furniture and Equipment 462,357 28.7%
Instruction Aids 211,849 13.1%
Textbooks 143,696 8.9%
Library Resources 42,700 2.6%
Total $1,613,177 100.0%
Potential Performance Measures
Performance measures could include:
1. Student participation rates in extracurricular activities and character education programs.
While the school districts would have this information available, this measure would require them to
compile and report additional data.
2. Funding by type of activity.
Prior Review
The credit was last reviewed by the Joint Legislative Income Tax Credit Review Committee in 2006. The
Committee recommended at that time that the credit be continued and placed on the 2011 review schedule.
This date was later moved to 2012 due to changes in the income tax credit review schedule enacted by
Laws 2009, Chapter 32.
SOLAR HOT WATER HEATER PLUMBING STUB OUTS
AND ELECTRIC VEHICLE RECHARGE OUTLETS
TAX CREDIT
-36-
Solar Hot Water Heater Plumbing Stub Outs
And Electric Vehicle Recharge Outlets Tax Credit
Summary
• The cost of the Solar Hot Water Heater Plumbing Stub Outs and Electric Vehicle Recharge Outlets
Tax Credit was $1,568 in tax year 2009, and $0 in tax years 2010 and 2011. Credit use has never
exceeded $12,000 in a single year.
• The Individual Income Tax credit was claimed by 16 taxpayers in tax year 2009 with an average claim
of $98. There have been no Corporate Income Tax credit claims since 2000.
• Trends have favored other technologies more than those promoted by this tax credit.
Statutes
A.R.S. § 43-1090 (Individual)
A.R.S. § 43-1176 (Corporate)
Description
The statutes provide individuals or corporations with an income tax credit for installing residential 1) solar
water heater plumbing stub outs, or 2) electric vehicle recharge outlets. A “stub out” is a fixture that is
designed to accommodate additions to the original plumbing. The statute defines the specific types of pipes
and wires that are required for the stub out to qualify for the tax credit. The recharge outlets must be
connected to the utility system by a dedicated line that meets various codes and industry standards.
The credit cannot exceed $75 for each installation for each separate dwelling unit. The credit may be
transferred from the builder to the purchaser of the dwelling.
Refundable
The credit is not refundable.
Carry Forward
The unused portion of the credit may be carried forward for a maximum of 5 consecutive years.
History and Rationale
Arizona’s current solar energy device tax credit was signed into law in June 1994 (Laws 1994, Chapter
117) and became effective for the 1995 tax year. (See separate discussion on Commercial and Industrial
Solar Energy Device Tax Credit.) Laws 1997, Chapter 218 amended the list of qualifying solar energy
devices to exclude “a solar hot water heater plumbing stub-out that was installed by the builder of a house
or dwelling unit before title was conveyed to the taxpayer.” This law also created a separate tax credit for
these devices (A.R.S. § 43-1090).
The statutes creating the tax credits for solar stub outs and electric vehicle recharge outlets do not include a
specific statement of purpose or a rationale. The credits were included in a floor amendment to SB 1523
that was passed by the House Committee of the Whole. An earlier bill, HB 2440, which included
provisions for the solar energy device tax credit, was heard by the House Ways and Means Committee. At
that time, the bill’s sponsor stated the purpose of the solar energy tax incentives was to restore Arizona to a
position of leadership in the solar energy field and to promote energy efficiency.
-37-
Revenue Impact
The preliminary cost of the individual tax credit was $1,568 in 2009, the last year in which individual
credits were used. The corporate income tax credit has not been claimed since 2000. The data in Table 1
below, which was provided by the Arizona Department of Revenue, shows the individual income tax
impact of this credit.
Solar Energy Industry Trends
When the solar stub out credit was created in the late 1990s, water heaters were the primary focus of solar
energy technology and public policy. In spite of federal and state tax incentives and public utility rebate
programs, solar water heaters did not prove to be widely popular among consumers and businesses. In
spite of the credit, there was little interest from home builders and buyers in plumbing modifications for
solar water heater installations.
In recent years, solar energy technology has evolved, and tax incentives and regulatory policies have
emerged to encourage investment in photovoltaic systems that generate electricity rather than merely heat
water. At the same time, growing interest in other forms of renewable energy, such as wind, biomass, and
biodiesel fuels, has diverted some energy investments away from solar energy technologies.
Electric Vehicle Industry Trends
The federal government established a tax credit for the purchase of qualified electric vehicles with the
Energy Policy Act of 1992. The credit, which was for 10% of the cost of the vehicle up to a maximum of
$4,000, expired in 2007. A similar credit of $2,500 to $7,500 for purchase of a plug-in electric vehicle
Table 1
Solar Hot Water Heater Plumbing Stub Outs and
Electric Vehicle Recharge Outlets Tax Credit – Individual Credit Claims by Tax Year
Tax Year
# of
Claimants
Total Credit
Available Credit Used Carry Forward
1998 23 $12,352 $8,874 $3,478
1999 35 16,859 7,944 8,915
2000 35 21,308 11,566 9,742
2001 18 16,951 7,804 9,147
2002 15 4,920 3,312 1,608
2003 2 x x x
2004 17 15,220 5,677 9,543
2005 22 18,538 9,687 8,851
2006 6 525 525 0
2007 0 0 0 0
2008 11 1,053 930 123
2009 16 2,850 1,568 1,282
2010 0 0 0 0
2011 0 0 0 0
____________
# of Claimants – the number of taxpayers who claimed the credit in each year.
Total Credit Available – the total tax credits identified in each tax year, including any new credits and
any credits carried over from a previous year and identified in that year.
Credit Used– the total value of credits claimed in each year.
Carry Forward– the total credit identified but not used in each year. The full carry forward may not be
reflected in the following year's estimate. For example, an individual could have $500 in credit
identified in tax year 2008, use $400 of it in 2008 (leaving $100 as a carry forward). If that individual
did not identify or claim that credit in 2009, that $100 carry forward could not be included in the carry
forward total for 2009.
x – No data released by the Department of Revenue.
-38-
(PEV) bought after December 31, 2009 was created by the American Recovery and Reinvestment Act of
2009. The size of the credit depends on the vehicle’s battery capacity and weight. This incentive remains
available to buyers until manufacturers’ sales of these vehicles grow to 200,000 in a calendar year quarter.
The federal government also provided subsidies to manufacturers to promote the development of PEVs.
Sales of PEVs have begun to grow moderately as new models become less expensive and can be driven for
longer distances without being recharged; however, non plug-in hybrid vehicles that combine internal
combustion engines with electric motors remain substantially more popular.
Economic Benefits
Measurable Economic Development
New Investments
Creation of New Jobs or Retention of Existing Jobs
There is no economic development at this level of credit usage. Investment in solar energy equipment has
increased in recent years, whereas the market for plug-in electric vehicles remains small compared to the
market for hybrid electric vehicles.
Complexity
The credit does not appear to be unusually complex in its description, calculation and application. The low
usage of this tax credit, however, does not appear to warrant the related administrative costs.
Potential Performance Measures
At this usage level, administering performance measures would outweigh the tax expenditure from the
credit.
Prior Review
The credit was last reviewed by the Joint Legislative Income Tax Credit Review Committee in 2006. The
Committee recommended at that time that the credit be eliminated. No bill was introduced during the 2007
regular session to repeal the credit.

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JLBC
Joint Legislative Budget Committee
Staff Memorandum
1716 West Adams Telephone: (602) 926-5491
Phoenix, Arizona 85007 Facsimile: (602) 926-5416
DATE: November 29, 2012
TO: Members, Joint Legislative Income Tax Credit Review Committee
FROM: Hans Olofsson, Chief Economist
SUBJECT: 2012 INCOME TAX CREDIT REVIEW - OPEN SESSION
This memo transmits background materials for the December 6, 2012 meeting of the Joint Legislative Income Tax
Credit Review Committee. The information contained in this memo is limited to those credits scheduled for review
in 2012 that do not include confidential taxpayer information, which are:
Page
♦ Family Income Tax Credit ..............................................................................................................................5
A.R.S. § 43-1073 (Individual)
♦ Credit for Solar Energy Devices; Commercial and Industrial Applications....................................................9
A.R.S. § 43-1085 (Individual)
A.R.S. § 43-1164 (Corporate)
♦ Credit for Donation to the Military Family Relief Fund ...............................................................................13
A.R.S. § 43-1086 (Individual)
♦ Credit for Contributions to Private School Tuition Organizations ................................................................17
A.R.S. § 43-1089 (Individual)
♦ Credit for Public School Extracurricular Activity Fees.................................................................................23
A.R.S. § 43-1089.01 (Individual)
♦ Credit for Solar Hot Water Heater Plumbing Stub Outs and Electric Vehicle Recharge Outlets..................36
A.R.S. § 43-1090 (Individual)
A.R.S. § 43-1176 (Corporate)
Credits that include confidential taxpayer information are reviewed in a separate memo.
Background
Laws 2002, Chapter 238 established the Joint Legislative Income Tax Credit Review Committee and specified a
schedule for review of corporate and individual income tax credits. While the 6 credits listed above will be
reviewed in open session, the following 3 credits will be discussed in executive session due to the inclusion of
confidential taxpayer information.
♦ Credit for Increased Employment in Military Reuse Zones
A.R.S. § 43-1079 (Individual)
A.R.S. § 43-1167 (Corporate)
♦ Credit for Construction Costs of Qualified Environmental Technology Facility
A.R.S. § 43-1080 (Individual)
A.R.S. § 43-1169 (Corporate)
♦ Credit for Donation of School Site
A.R.S. § 43-1089.02 (Individual)
A.R.S. § 43-1181 (Corporate)
(Continued)
- 2 -
As a result of Laws 2010, Chapter 225, the Department of Revenue (DOR) may disclose confidential statistical
information to this Committee and JLBC Staff. DOR views tax credit information to be confidential if: (1) 3 or less
taxpayers claimed the credit, or (2) 90% or more of the total credit used to offset tax liability was attributable to a
single taxpayer.
The Joint Legislative Income Tax Credit Review Committee is charged with determining the original purpose of
each of the existing income tax credits and establishing a standard for evaluating the success or failure of the credit.
Pursuant to statute (A.R.S. § 43-221), the standard for evaluation of the credits may include: (1) the history,
rationale and revenue impact, (2) the benefit to the state in various economic terms, and (3) the complexity in the
use and administration of the credit.
The Credit for Solar Energy Devices and the Credit for Donation to the Military Family Relief Fund are the only
credits on the 2012 review schedule that have not been reviewed by the committee in prior years.
Limitations
There are several limitations that affect the evaluation of income tax credits. For example, the timeliness of data is
one such limitation. Because tax credit data must generally be compiled manually from actual hard-copy tax
returns, corporate credit data is currently available only through tax year 2009. Both 2009 corporate tax credit data
and 2010 individual tax credit data are preliminary and thus subject to revision.
A second limitation is the lack of performance measures for tax credits. Some credits have stated performance
measures or goals, but most of the credits do not have objectives included in statute. Chapter 238, however, requires
any new credit to include a clause that explains the rationale and objective of the credit (A.R.S. § 43-223).
Finally, the evaluation of tax credits in terms of their economic benefits to the state is often difficult to conduct since
the data required to do so is rarely available. For example, while the amount spent on equipment or property by a
facility is reported for purposes of claiming the environmental technology facility credit, there is no data on the
number of new jobs associated with these investments.
2012 Review
The following information is provided (where applicable) for each of the credit categories:
Description - the definition of the tax credit, and how the credit is calculated.
Refundable - whether the credit is refundable or nonrefundable. A nonrefundable credit can never exceed the
taxpayer’s tax liability. Instead, any amounts not used to offset the taxpayer’s liability in a taxable year can either
be carried forward to future tax years or must be forfeited in the same tax year. By contrast, a refundable credit is
allowed to exceed the taxpayer’s tax liability and any excess amounts are refunded to the taxpayer. None of the
credits included in the current review is refundable.
Transferable - whether or not any unused portion of the credit can be sold or otherwise transferred to other
taxpayers. None of the credits included in the current review is transferable.
Carry Forward - whether or not any unused nonrefundable credit may be carried forward into subsequent tax years,
and if so, for how many years.
History and Rationale - the year the tax credit was implemented, revisions to the credit since its enactment, and
relevant information regarding the intended purpose of the credit.
Revenue Impact - based on data reported by DOR, information for each tax year on the number of claimants, the
amount of total available credit, credit used, and credit carried forward to a subsequent tax year.
Economic Benefits - a summary of information available related to any economic benefits associated with each tax
credit, including economic development, new investments, job creation or retention of existing jobs, and any other
economic benefits that may be specific to each credit.
(Continued)
- 3 -
Complexity - information related to the complexity of administration and application of each tax credit, including the
perspective of the state agencies administering the credit, as well as the trade associations and representatives of the
corporations and/or individuals claiming the credit.
Potential Performance Measures - a listing of potential measures that might be used to evaluate each of the income
tax credits.
The reported information was obtained from a variety of sources. The JLBC Staff reviewed the statutes establishing
each of the credits, as well as the tax forms and instructions used by businesses and individuals to claim the credits.
The Staff also reviewed summaries and minutes of committee and subcommittee hearings that were held prior to
adoption of the credits. Various agencies were contacted, including DOR and the Arizona Commerce Authority.
HO:ac
Attachment
xc: Reed Spangler, Senior Policy Advisor, Senate
Jeff Winkler, Policy Advisor, Senate
Carolyn Speroni, Senate Finance Committee Analyst
Lorenzo Romero, Director of Fiscal Policy, House
Mark Bogart, Senior Economist/Policy Advisor, House
Stephanie Jaffa, House Ways and Means Committee Analyst
FAMILY INCOME TAX CREDIT
- 5 -
Family Income Tax Credit
Summary
• The cost of the Family Income Tax Credit was an estimated $5.8 million in tax year 2011.
• The credit was claimed by 516,785 tax-filers at an average of $11 per claim.
• Average credit use is declining as other tax law changes have assisted low-income taxpayers.
• While labeled as a family tax credit, single households with no dependents are also eligible for the credit.
Statute
A.R.S. § 43-1073 (Individual Income Tax)
Description
This credit is provided to taxpayers below certain income levels. A taxpayer’s income limit depends on
both their filing status and the number of dependents claimed on their tax return.
The credit is currently $40 for each member of a household for whom a personal or dependent exemption is
allowed. However, the total amount of credit claimed cannot exceed $240 for married taxpayers filing joint
returns or for single persons filing as head of household. The credit is limited to $120 for singles and
married couples filing separate returns.
For taxpayers whose filing status is single or married filing separately, their Arizona adjusted gross income,
plus any amounts subtracted for non-personal exemptions, must be less than or equal to $10,000 to qualify
for the credit. For most taxpayers, this amount is the same as their federal adjusted gross income. The
income thresholds for other taxpayers are shown in Table 1 below.
Table 1
Income Limit By Filing Status
and Number of Dependents
Filing
Status
# of
Dependents
Income
Limit
MFJ1/ < 2 $20,000
MFJ 2 23,600
MFJ 3 27,300
MFJ ≥ 4 31,000
HOH2/ < 2 20,000
HOH 2 20,135
HOH 3 23,800
HOH 4 25,200
HOH ≥ 5 26,575
____________
1/ Married couples filing joint returns.
2/ Single persons filing as head of household.
Refundable
The credit is not refundable.
Carry Forward
No carry-forward of unused credits is allowed.
History and Rationale
This credit was created by Laws 1995, 1st Special Session, Chapter 9 (SB 1009) and became effective
retroactively from January 1, 1995. The credit was one of several tax provisions in SB 1009 that were
designed to reduce both property and individual income taxes by $(200) million annually. According to
- 6 -
both House Ways and Means and Senate Finance Committee minutes from March 15, 1995, the credit was
intended to help reduce low-income households’ tax liability.
Laws 1998, 4th Special Session, Chapter 3 (SB 1007) increased the per-person credit from $30 to $40 and
expanded the application of the credit from 4 to 6 household members, as reflected in the table on the
previous page. As noted earlier, the maximum credit per taxpayer was increased from $120 to $240 for
married couples filing joint returns and for single persons filing as head of household, and from $60 to
$120 for all other taxpayers. The expansion of the family income tax credit was one of several provisions
contained in the “Tax Relief Act of 1998” that were designed to reduce individual income taxes by $(50)
million annually. (Note that both Laws 1995, Chapter 256 and Laws 1998, 5th Special Session, Chapter 2
provided minor technical changes to the family income tax credit.)
Revenue Impact
Based on preliminary data provided by the Department of Revenue (DOR), the cost of the credit was $5.8
million in 2011. Over the life of the credit, the cost has varied from a low of $4.6 million in 1997 to a high
of $7.9 million in 1999. There were a total of 516,800 credit claimants in 2011, or approximately 20% of
all residential filers. Credit use has been trending down gradually since 2000.
The family income credit will only reduce a taxpayer’s liability and any amount in excess of their liability
cannot be refunded or carried over to next tax year. This means that a taxpayer may only be able to use a
portion of the maximum credit available. The average credit available per taxpayer increased from $59 in
1997 to $88 in 1998 but has remained stable ever since. This increase was mainly attributable to a 1998 tax
law change, which raised the per-person family income tax credit from $30 to $40. The average credit used
(actual amount used to offset a taxpayer’s liability) was $11 in 2011. The data in Table 2 below, which was
provided by DOR, shows the annual impact of the family income tax credit.
Table 2
Family Income Tax Credit – Credit Claims by Tax Year
Tax Year # of Claimants
Total Credit
Available
Avg. Credit
Available Credit Used
Avg. Credit
Used
1995 340,844 $20,600,000 $60 $5,150,000 $15
1996 340,790 20,526,564 60 5,071,340 15
1997 345,223 20,483,252 59 4,637,593 13
1998 1/ 312,768 27,669,951 88 7,390,406 24
1999 327,974 28,374,663 87 7,925,721 24
2000 335,253 28,924,670 86 7,799,840 23
2001 402,094 33,377,585 83 7,356,939 18
2002 427,798 36,064,781 84 7,382,178 17
2003 417,451 35,068,208 84 7,445,937 18
2004 425,484 35,617,953 84 7,709,270 18
2005 439,056 36,737,292 84 7,661,867 17
2006 448,960 37,349,413 83 6,867,294 15
2007 518,820 42,706,477 82 6,784,150 13
2008 501,013 42,060,538 84 5,811,534 12
2009 515,867 44,711,520 87 5,270,319 10
2010 516,513 44,548,440 86 5,594,106 11
2011 516,785 44,268,240 86 5,817,731 11
_____________
1/ Laws 1998, 4th Special Session, Chapter 3 increased the per-person credit from $30 to $40.
# of Claimants – the number of taxpayers who claimed the credit in each year.
Total Credit Available – the total tax credits identified in each tax year.
Credit Used – the total value of credits claimed in each year.
Table 2 suggests that while the average available per-person credit has remained fairly stable over time
(approximately 2 persons claimed per taxpayer), the average credit used to offset actual tax payments has
declined significantly. For example, in the period between 1998 and 2011, the average credit used
decreased from $24 to $11 in comparison to a reduction from $88 to $86 for the average available credit.
- 7 -
The decline of the average credit used is largely attributable to other tax law changes enacted after 1998,
such as a series of rate reductions and a new requirement that the standard deduction be adjusted for
inflation each year. These tax law changes have reduced the tax liability for all taxpayers, including low-income
earners. This means that a smaller fraction of a low-income earner’s available credit is now
required to reduce his liability to $0 than previously.
Economic Benefits
Measurable Economic Development
New Investments
Creation of New Jobs or Retention of Existing Jobs
This credit is not directly designed to promote economic development or spur new investments that would
result in new jobs. Instead, according to DOR’s August 2000 report “Income Tax Credits in Arizona,” the
family income tax credit is intended to alleviate the tax burden on low-income individuals. Two other
income tax credits provided by Arizona law – earned credit for property taxes (A.R.S. §43-1072) and the
Proposition 301 0.6% sales tax credit (A.R.S. §43-1072.01) – have the same objective. The property tax
credit is limited to senior citizens and recipients of Supplemental Security Income with a household income
below $5,501. Proposition 301 provided a $25 per-person credit for households with a federal adjusted
gross income of up to $25,000 and was intended to offset the cost to the taxpayer of a 0.6% sales tax
enacted in 2001. Unlike the family income tax credit, both the property tax and sales tax credit are
refundable.
The information above suggests that a taxpayer may be eligible for more than one of the 3 low-income tax
credits provided in statutes. For example, a single mother with two dependent children and an annual
income of $20,000 would qualify for a family income credit of $120 (of which about $45 would be used to
fully offset her tax liability) and a refundable Proposition 301 sales tax credit of $75.
Although the family income tax credit was not directly intended to promote economic growth, it may still
provide some economic benefits to society since it effectively increases the disposable income of low-income
households. A higher disposable income, all else equal, should have the effect of increasing
economic activity in the state somewhat. For the individual taxpayer, the credit may have the effect of
marginally increasing his spending on goods and services, which in the aggregate could result in the
creation of new jobs and increased investments in the state.
According to a recent study by the Center on Budget and Policy Priorities (“The Impact of State Income
Taxes on Low-Income Families in 2011”), two-parent families of four with incomes below the federal
poverty line ($23,018) are liable for state income taxes in 15 of the 42 states that levy such tax. The lowest
income level at which such families begin incurring state income tax liability (“threshold”) varies between
$12,500 (Montana) and $49,400 (California). With a threshold of $23,600, the report ranks Arizona 17th in
the nation. The average liability threshold for the nation as a whole is $27,545, or $4,527 above the federal
poverty line. (Note: the higher the rank, the higher the income threshold.)
Complexity
Unlike most other credits, the family income tax credit does not require a separate form to be appended to
the individual income tax return filed by the taxpayer. Instead, the income tax form instruction includes a
worksheet for the taxpayer to determine eligibility and the amount of the credit. According to DOR, this
worksheet is relatively easy to use since all the information that is necessary for the credit calculation is
included on the individual’s income tax form. For this reason, the credit requires no separate
administration or approval process by DOR.
Potential Performance Measures
There are no suggested performance measures.
- 8 -
Prior Review
The credit was last reviewed by the Joint Legislative Income Tax Credit Review Committee in 2006. The
Committee recommended at that time that the credit be continued and placed on the 2011 review schedule
and be further amended to be adjusted for inflation each year. (The date was later moved back to 2012 due
to changes in the income tax credit review schedule enacted by Laws 2009, Chapter 32.)
A bill was introduced during the 2007 regular session (HB 2080) that would have provided for an annual
inflation-adjustment of the income thresholds to qualify for the credit. This bill, however, was never heard
in any committee.
COMMERCIAL AND INDUSTRIAL SOLAR ENERGY DEVICE
TAX CREDIT
- 9 -
Commercial and Industrial Solar Energy Device Tax Credit
Summary
• The cost of the Commercial and Industrial Solar Energy Device Tax Credit was $129,500 for corporate
income tax filers in tax year 2010 and $51,400 for individual income tax filers in 2011.
• The credit was claimed by 12 corporate income tax taxpayers in 2010 at an average of $10,794 per claim.
• The credit was claimed by 17 individual income tax taxpayers in 2011 at an average of $3,023 per claim.
• While this credit is for the use of solar energy devices in commercial and industrial applications, the state
also offers separate residential solar tax credits.
Statute
A.R.S. § 43-1085 (Individual)
A.R.S. § 43-1164 (Corporate)
Description
The statutes provide individuals or corporations with an income tax credit for the installed cost of a solar
energy device used in their trade or business. Solar energy devices are defined in A.R.S. § 42-5001 as
systems or mechanisms that provide heating, cooling, electrical and mechanical power, daylighting, and
energy storage.
A taxpayer can claim a credit equal to 10% of the installed cost of a solar energy device used in their trade
or business. The credit cannot exceed $25,000 per building annually or $50,000 in total per business in any
year. The credit is available between tax years 2006 and 2018 and is capped at $1,000,000 per year. Tax
credits are authorized on a first come, first served basis as determined by the Arizona Commerce Authority.
The credit also may be transferred to a third party that manufactures or installs a qualifying device.
Refundable
The credit is not refundable.
Carry Forward
The unused portion of the credit may be carried forward for a maximum of 5 consecutive years.
History and Rationale
The federal government first introduced individual solar energy tax credits with the Energy Tax Act of
1978. Arizona created its first solar energy tax credit in 1979. The federal tax credit expired in 1985 and
Arizona’s tax credit expired in 1987. The Energy Policy Act of 2005 established federal tax credits of 30%
of expenditures on qualified residential, commercial, and industrial solar energy devices. The Energy
Improvement and Extension Act of 2008 extended these credits for solar devices purchased before
December 31, 2016 and removed all federal credit caps.
Arizona’s commercial and industrial solar energy device tax credit was signed into law in June 2006 (Laws
2006, Chapter 333) and became effective for the 2006 tax year. Laws 2010, Chapter 294 extended the tax
credits expiration date from December 31, 2012 to December 31, 2018. Chapter 333 included language
stating the purpose of the credit is “to stimulate the production and use of solar energy in commercial and
industrial applications in this state.”
The credit creates an incentive to purchase solar energy systems by reducing the cost. Since its creation in
2006, the credit has been used mostly to purchase photovoltaic (PV) solar energy devices. Electric utility
companies in the state also offer customer rebate programs in order to meet either regulatory or self-imposed
standards for renewable energy generation. In combination with the state tax credit, the cost of a
- 10 -
solar PV system can be reduced by approximately 20%. When also factoring in federal tax credits, the cost
can be reduced by approximately 50%. However, investment in solar energy devices may become more
costly in future years as some utilities phase out their rebate programs.
The state also provides tax credits to reduce installation costs of residential solar energy devices.
Individual filers can receive a credit equal to 25% of the cost of installing a solar energy device at their
residence, up to maximum of $1,000. According to the Corporation Commission, this credit was
historically used to purchase solar water heaters and daylighting systems, but in recent years has
increasingly been used to purchase solar PV systems. Individuals and corporations can also receive a tax
credit of up to $75 for installing residential 1) solar water heater plumbing stub outs, or 2) electric vehicle
recharge outlets. An individual filer can combine the two credits for a maximum of $1,075 for the
residential installation of stub outs and a solar water heater system. The credits may not be combined
though, with the Commercial and Industrial Solar Energy Device Tax Credit.
Revenue Impact
Corporate
The cost of the credit used by corporate taxpayers was $129,528 in 2010, according to preliminary
estimates. Table 1 summarizes the corporate income tax impacts of this credit, as reported by the Arizona
Department of Revenue.
Individual
The cost of the credit used by individual taxpayers was $51,384 in 2011, according to preliminary
estimates. Table 2 summarizes the individual income tax impacts of this credit, as reported by the Arizona
Department of Revenue.
Table 1
Commercial Solar Energy Device Credit – Corporate Credit Claims by Tax Year
Tax Year
# of
Claimants
Total Credit
Available Credit Used Carry Forward
2006 x x x x
2007 x x x x
2008 7 85,550 74,899 10,651
2009 10 202,692 87,118 115,574
2010 12 194,824 129,528 65,296
__________
# of Claimants – the number of taxpayers who claimed the credit in each year.
Total Credit Available – the total tax credits identified in each tax year, including any new credits and any
credits carried over from a previous year and identified in that year.
Credit Used– the total value of credits claimed in each year.
Carry Forward– the total credit identified but not used in each year. The full carry forward may not be
reflected in the following year's estimate. For example, an individual could have $500 in credit identified in
tax year 2008, use $400 of it in 2008 (leaving $100 as a carry forward). If that individual did not identify or
claim that credit in 2009, that $100 carry forward could not be included in the carry forward total for 2009.
x — No data released by the Department of Revenue.
- 11 -
Economic Benefits
Measurable Economic Development
New Investments
Creation of New Jobs or Retention of Existing Jobs
There are no studies of the magnitude of economic development, new investment, or the creation or
retention of jobs related to this specific credit. The credit was applied against the purchase of
approximately $7.5 million of solar devices in 2010 (this is the last year of data available for both
individual and corporate tax credit use). This level of purchase likely had some positive impact on the
industry, but it is difficult to know whether the same level of devices would have been purchased without a
10% discount provided by the credit. Investment in solar energy equipment has increased in recent years,
though this occurred while use of the tax credit remained well below the $1,000,000 annual cap. While
there is a lack of economic impact data on this credit, Arizona’s total solar-related employment has
increased from 3,800 in 2010 to 4,800 in 2011 (approximately 25%), according to a study by the Solar
Foundation.
Complexity
The solar energy device credit does not appear to be unusually complex in terms of its application,
administration, and approval process. The $1,000,000 cap could add complexity, but credit use is not close
to that level yet.
Potential Performance Measures
Performance measures could include:
1. Total megawatt hours of electricity generated from solar energy devices.
2. Total megawatt hours of electricity conserved from non-renewable energy sources.
3. Number of persons employed in businesses that manufacture, install or service solar energy devices.
Table 2
Commercial Solar Energy Device Credit – Individual Credit Claims by Tax Year
Tax Year
# of
Claimants
Total Credit
Available Credit Used Carry Forward
2006 5 $27,507 $18,086 $9,421
2007 15 75,549 54,558 20,991
2008 53 428,724 279,874 148,850
2009 81 549,543 325,054 224,489
2010 46 471,117 257,980 213,137
2011 17 157,080 51,384 105,696
_________
# of Claimants – the number of taxpayers who claimed the credit in each year.
Total Credit Available – the total tax credits identified in each tax year, including any new credits and any
credits carried over from a previous year and identified in that year.
Credit Used– the total value of credits claimed in each year.
Carry Forward– the total credit identified but not used in each year. The full carry forward may not be
reflected in the following year's estimate. For example, an individual could have $500 in credit identified
in tax year 2008, use $400 of it in 2008 (leaving $100 as a carry forward). If that individual did not
identify or claim that credit in 2009, that $100 carry forward could not be included in the carry forward
total for 2009.
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The statute does not impose any requirements related to these measures. Arizona Public Service Co. (APS)
and UniSource (Tucson Electric Power and Citizens Utilities) measure and report the amount of solar
electricity generated in their service territories to the Arizona Corporation Commission on a regular basis.
Salt River Project publicly reports similar information. However, the amount of energy saved by other
solar energy devices, including water heaters, can only be estimated, and requiring this information would
create an additional reporting burden.
A previously mentioned study found that Arizona employs 4,800 people in a range of solar-related jobs,
which is third most of any state. The Solar Foundation, a non-profit organization that promotes use of solar
technologies, produces an annual report that estimates the sector’s employment in each state. Jobs
measured in the study though, also include residential solar sector employment. A limitation of using Solar
Foundation job estimates as a performance measure therefore, is that they may also be impacted by the
other state and federal solar tax credits.
Prior Review
The credit has not been reviewed by the committee before.
DONATION TO THE MILITARY FAMILY RELIEF FUND
TAX CREDIT
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Donation to the Military Family Relief Fund Tax Credit
Summary
• The cost of the Donation to the Military Family Relief Fund (MFRF) Individual Income Tax Credit was
$996,700 in tax year 2011.
• The credit was claimed by 3,007 taxpayers in tax year 2011 at an average of $331 per claim.
• The credit is available only to individuals, not to business entities, filing an individual income tax form.
Statute
A.R.S. § 43-1086 (Individual)
Description
The statute provides individuals an income tax credit for cash donations to the MFRF. The fund helps
deployed or veteran service members and their families faced with financial hardship. The Arizona
Department of Veterans Services (DVS) receives donations and administers the fund established by Laws
2007, Chapter 258.
Taxpayers can claim a credit up to $200 if filing as single or head of household and $400 for those filing as
a married couple. The credit is available between tax years 2008 and 2018 and is capped at $1,000,000 per
year. The credit may not be transferred to a third party.
Refundable
The credit is not refundable.
Carry Forward
No carry-forward of unused credits is allowed.
History and Rationale
Though no specific federal tax credit exists for military-focused donations, taxpayers can deduct charitable
contributions to military non-profit organizations from their federal adjusted gross income. The War
Revenue Act of 1917 first allowed these deductions of charitable donations. Today, federal tax filers can
deduct the entire donation amount, up to 30% of their adjusted gross income for cash donations and 20%
for property.
Arizona’s Donations to the MFRF tax credit was signed into law in June 2007 (Laws 2007, Chapter 258)
and became effective for the 2008 tax year. Laws 2012, Chapter 281 extended the tax credit’s expiration
date from December 31, 2012 to December 31, 2018. Since the credit became available to taxpayers in
2008, it has been used nearly to its full $1,000,000 annual cap each year.
Laws 2007, Chapter 258 states that the purpose of the credit is to “encourage contributions for the
compassionate relief of military widows, widowers, spouses and minor children of military personnel in
this state who were killed or wounded in the line of duty” after September 11, 2001. Laws 2010, Chapter
254 extended eligibility for grants made from cash donations to families of all military personnel deployed
to a combat zone since September 11, 2001 who are experiencing financial hardship. Financial assistance
applications of up to $20,000 are evaluated by the Governor-appointed Military Family Relief Advisory
Committee.
Revenue Impact
The preliminary cost of the credit in 2011 was $996,695. Table 1 summarizes the individual income tax
impacts of this credit, as reported by the Arizona Department of Revenue (DOR).
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Economic Benefits
Measurable Economic Development
New Investments
Creation of New Jobs or Retention of Existing Jobs
This credit is not directly designed to promote economic development or spur new investments that would
result in new jobs. The credit may still provide some economic benefits, since the additional donations
raise the disposable income of grantee families under financial hardship. The economic impact would be
small however, since the credit can only be claimed up to $1,000,000 each year. In FY 2012, $562,100 in
grants were made to families from donations to the MFRF (see Table 2). Donation amounts that are not
used for grant making remain in the MFRF until December 31, 2018. After this date, any remaining fund
balance will be transferred to the Veterans’ Donations Fund. The MFRF had a balance of $3,151,200 at the
end of FY 2012.
Complexity
The credit is not entirely simple to administer since, once the $1,000,000 cap is reached, DVS physically
mails back subsequent contributions. Donations in 2009 and 2010 exceeded $1,000,000 (see Table 3) as
some donors contributed more than the $200 or $400 maximum eligible for a credit. Laws 2007, Chapter
258 permit the Military Family Relief Advisory Committee to use up to 5% of donations for the costs of
administering the financial assistance program. While donations to the MFRF have historically exceeded
grants (see Tables 2 and 3), the annual difference between the two has decreased since Laws 2010, Chapter
254 expanded eligibility criteria for grant applicants.
Table 1
Military Family Relief Fund Credit – Credit Claims by Tax Year
Tax
Year
# of
Claimants
Total Credit
Available Credit Used Carry Forward
2008 3,070 $982,575 $982,575 $0
2009 3,185 998,331 998,331 0
2010 3,052 995,849 995,849 0
2011 3,007 996,695 996,695 0
________
# of Claimants – the number of taxpayers who claimed the credit in each year.
Total Credit Available – the total tax credits identified in each tax year, including any new credits and
any credits carried over from a previous year and identified in that year.
Credit Used – the total value of credits claimed in each year.
Carry Forward – This tax credit may not be carried forward.
Table 2
Grants from the MFRF
Fiscal
Year
Total
Grants
2009 $11,600
2010 126,600
2011 233,400
2012 562,100
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Potential Performance Measures
Performance measures could include:
1. Number and dollar amount of donations made to the Military Family Relief Fund.
2. Number and dollar amount of grants made from the Military Family Relief Fund to military families.
The statute does not impose any requirements related to these measures. DOR provides data on donations
to the fund in their annual Credit History report and DVS provides grant data in their annual budget
request.
Prior Review
The credit has not been reviewed by the committee before.
Table 3
Donations to the MFRF
Tax
Year
# of
Donations
Total
Donations
2008 3,130 $993,132
2009 3,259 1,004,775
2010 3,128 1,000,384
2011 3,093 999,296
PRIVATE SCHOOL TUITION ORGANIZATION TAX CREDIT
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Private School Tuition Organization (“Private School STO-1”) Tax Credit
Summary
• Current law authorizes two tax credits for contributions that individuals make to school tuition organizations
(STOs). This review pertains only to the “original” Private School STO tax credit (“private school STO-1”)
authorized by A.R.S § 43-1089. The second credit (“private school STO-2”) was recently established by Laws
2012, Chapter 4 (A.R.S § 43-1089.03) and is not yet subject to review.
• Approximately 63,000 individuals claimed $43.2 million in credits for contributions to 53 different STOs under
“private school STO-1” in calendar year (CY) 2010 (latest available data).
• The maximum tax credit allowed in CY 2010 was $500 for single filers and $1,000 for married couples filing
jointly. Those maximums are now adjusted annually for inflation and for CY 2012 will be $503 and $1,006,
respectively.
• The credit results in foregone General Fund costs to the extent that STO-funded scholarships result in students
not attending public school. To offset the current $43.2 million level of tax credits under private school STO-1,
approximately 8,150 students would have to be diverted from public school due to STO scholarships (8,150
students X $5,300 statewide average savings per public school student = $43.2 million).
Statute
A.R.S. § 43-1089.
Description
This credit is provided to individuals for voluntary contributions to STOs. A STO is defined as a charitable
organization that is exempt from federal taxation and that allocates at least 90% of its tax credit-eligible revenue for
educational scholarships or tuition grants to children to attend non-governmental elementary or secondary schools.
A STO may use up to 10% of tax credit-eligible contributions for administration expenses. The “90% for
scholarships” restriction does not apply to STO revenues (if any) that are not linked to tax credits, such as interest
earnings or employer matching contributions.
The “private school STO-1” tax credit is not allowed if the taxpayer designates the taxpayer's contribution to the
STO for the direct benefit of any dependent of the taxpayer or if the taxpayer designates a student beneficiary as a
condition of the taxpayer's contribution to the STO. The tax credit is not allowed if the taxpayer, with the intent to
benefit the taxpayer's dependent, agrees with one or more other taxpayers to designate each taxpayer's contribution
to the school tuition organization for the direct benefit of the other taxpayer's dependent. A STO cannot award,
restrict or reserve scholarships solely on the basis of a donor's recommendation. If a STO scholarship exceeds a
school's total cost of educating the recipient, the school must return the excess portion to the STO.
Refundable
The credit is not refundable.
Carry Forward
The unused portion of the credit may be carried forward for a maximum of 5 consecutive years.
Transferable
The credit is not transferable.
History and Rationale
The “private school STO-1” tax credit was created by Laws 1997, Chapter 48 and became effective January 1, 1998.
Chapter 48 also established the public school extracurricular activity fee tax credit.
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The program has been subject to litigation. In Kotterman v. Killian (September 1997), opponents of the tax credit
challenged its constitutionality in state court, claiming that it violated both federal and state prohibitions against
using public monies to support a religious establishment, and a state prohibition against using public monies for
private or sectarian schools. The Arizona Supreme Court upheld the tax credit in January 1999, ruling that STOs
scholarship monies never enter into the state’s control or reach the State Treasury. In Winn v. Hibbs (February
2000) opponents filed a challenge to the program in federal court. In April 2011, the U.S. Supreme Court upheld the
program, ruling that the plaintiffs did not have legal standing to challenge it.
As originally enacted, the maximum credit allowed under “private school STO-1” was $500. Laws 2000, Chapter 1,
5th Special Session increased the cap to $625 for married taxpayers filing a joint return. Laws 2005, Chapter 334
increased the maximum credit for married couples filing jointly from $625 to $825 for taxable year 2005 and to
$1,000 for taxable year 2006 and thereafter. Chapter 334 left the maximum credit for single individuals and heads
of households unchanged at $500. Laws 2010, Chapter 293 requires annual inflation adjustments to the maximum
credit amounts. For CY 2012, the inflation-adjusted maximums will be $503 and $1,006, respectively.
Laws 2012, Chapter 4 establishes a second private school STO tax credit (“private school STO-2”) starting in tax
year 2012 pursuant to A.R.S § 43-1089.03. The new credit is allowed only after the taxpayer has used the maximum
credit available under "private school STO-1." “Private school STO-2" scholarships may only be awarded to public
school transfers, kindergarteners, preschool disabled students, military dependents, or pupils who received a
corporate STO or "private school STO-2" scholarship in the prior year, which are restrictions that do not apply to
“private school STO-1”.
“Private school STO-1” and “private school STO-2” are tax credits for individuals. Corporations and insurers also
may receive tax credits for contributions to STOs under separately-authorized programs. The corporate STO tax
credits are not subject to Committee review this year. Attachment 1 provides an overview of all current STO tax
credit programs.
The statute creating the “private school STO-1” tax credit does not include a specific statement of purpose or a
rationale. Minutes from committee meetings indicate supporters were seeking to provide more educational
opportunities for children from low-income families.
Revenue Impact
Table 1 summarizes individual contributions to STOs under “private school STO-1” since the inception of the
program in CY 1998, as reported by the Arizona Department of Revenue. In CY 2010 (the most recent calendar
year data) 62,941 individuals donated a total of $43.2 million to STOs under the program.
Table 1
Individual Contributions to School Tuition Organizations for “Private STO-1”
Calendar Year 1/ # of STOs # of Donations Amount % Change
1998 16 4,248 $ 1,815,800
1999 33 32,023 13,781,300
2000 36 38,249 17,701,300 28.4
2001 43 46,696 24,897,400 40.7
2002 43 52,203 26,512,700 6.5
2003 51 58,122 29,445,600 11.1
2004 53 63,830 31,846,500 8.2
2005 53 69,239 42,196,200 32.5
2006 56 73,617 51,012,326 20.9
2007 55 76,065 54,305,000 6.5
2008 55 78,434 55,260,700 1.8
2009 54 73,430 50,879,200 (7.9)
2010 53 62,941 43,183,500 (15.1)
_____________
1/ STOs historically have reported data on a calendar year basis, but are required to report on a fiscal year basis starting in FY 2011. As a
result, the most recent DOR report for “private school STO-1” includes a mix of current year (CY 2010) and fiscal year (FY 2011) data.
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The credit results in foregone General Fund costs to the extent that STO-funded scholarships result in students not
attending public school. Currently each pupil added to the statewide K-12 Average Daily Membership (ADM)
count costs the state General Fund about $5,300, on average. The state General Fund, therefore, saves an average of
$5,300 for each “private school STO-1” scholarship recipient who otherwise would attend public school. This
implies that the program has no net General Fund cost if at least 8,150 students would have otherwise attended
public schools in the absence of “private school STO-1” scholarships ($43.2 million in credits used in TY 2010 ÷
$5,300 state savings per pupil ≈ 8,150 students). The actual number of students in this category is unknown.
Beyond its impact on K-12 operating costs, the credit could result in lower School Facilities Board (SFB) costs for
new school construction and building renewal. New school construction costs would be reduced if the SFB
approved fewer new schools because of lower public school enrollment growth from the credit. This would reduce
SFB building renewal costs as well because fewer school buildings would require funding under that formula. The
amount of SFB “foregone costs” due to the credit is unknown. In addition, there has been little SFB-funded new
school construction in recent years due to slow population growth and the SFB building renewal formula has been
replaced by a significantly smaller program.
Economic Benefits
This credit is not directly designed to promote economic development or spur new investments that would result in
new jobs. Instead, according to DOR’s August 2000 report “Income Tax Credits in Arizona,” this credit is one of
several tax credits in statutes primarily intended to encourage cash contributions to certain target groups in society,
such as the working poor or students in private or public schools.
Attachment 2 (from the FY 2011 DOR School Tax Credit Report) provides information on contributions received
and scholarships awarded by each STO under “private school STO-1” for FY 2011. In that year, a total of $51.4
million was received. (Note: Attachment 2 is reported on a fiscal year basis, whereas Table 1 above is reported on a
calendar year basis, so covers a different 12-month period.) Ten STOs that received more than $1 million in
contributions in FY 2011 accounted for $41.1 million, or about 80%, of total revenues for that year.
STOs distributed $47.1 million of the $51.4 million received in donations in CY 2011 (see Attachment 2).
Remaining donation revenues were either allocated for administrative costs or retained for future year awards.
Historical data on scholarships and grants on a calendar year basis are summarized in Table 2 below.
Table 2
Scholarship Data for “Private School STO-1”
Calendar Year Total $ Awarded # of Scholarships Average Scholarship
1998 $ 103,800 128 $ 811
1999 2,193,700 3,207 684
2000 13,562,000 15,081 899
2001 16,485,000 18,049 913
2002 22,826,700 19,582 1,166
2003 24,420,100 20,134 1,213
2004 28,025,100 21,146 1,325
2005 30,863,200 22,529 1,370
2006 40,595,000 24,678 1,645
2007 48,561,700 27,153 1,788
2008 54,205,400 28,326 1,914
2009 52,127,300 27,592 1,889
2010 47,344,400 26,433 1,791
The total number of awards distributed under the program has increased from 128 in 1998, the first year the credit
was offered, to a peak of 28,326 in 2008 (see Table 2). In the most recent year (2010), 26,433 scholarships were
awarded, which was (1,893) fewer or (7)% less than the FY 2008 peak. The average scholarship likewise peaked in
2008 at $1,914 and has since declined to $1,791, or $(123) and (6.4)% below the 2008 level.
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DOR notes in its annual report that a “many families seek scholarships from multiple STOs, resulting in one child
being counted several times in the scholarship counts.” As a result, the number of scholarships reported in Table 2
does not equate to the number of students receiving scholarships. Past analysis on this topic suggests that the
number of individual students receiving STO scholarships is roughly equal to 90% of the total number of
scholarships awarded. For 2010 this would equate to approximately 23,800 individual students receiving “private
school STO-1” scholarships (26,433 total scholarships X 90% unduplicated = 23,800 individual recipients).
Private schools enrolled an estimated 44,559 students in FY 2010 under most recent estimates from the National
Center on Education Statistics (NCES), which is the federal clearinghouse for education data. This represented
4.1% of Arizona’s total K-12 population in FY 2010. With an estimated 23,800 individual private school students
receiving an award (see above), the JLBC Staff estimates that 53% of private school students receives a scholarship
under “private school STO-1” in 2010 (23,800 estimated recipients ÷ 44,559 estimated private school students =
53%).
Historical data on private and public school enrollment is summarized in Table 3.
Table 3
Private and Public School Enrollment
FY 2000 FY 2002 FY 2004 FY 2006 FY 2008 FY 2010
FY 00 - 10
Growth
Private School Enrollment 1/ 44,060 44,360 46,366 50,013 51,590 44,559 1.1%
Public School Enrollment 2/ 840,130 879,106 933,734 998,221 1,044,785 1,051,767 25.2%
____________
1/ Data from the National Center for Education Statistics: Private School Universe Survey
2/ Data from the Arizona Department of Education: Annual Report
As indicated in Table 3, Arizona’s private school enrollment grew from 44,060 students in FY 2000 to 44,559
students in FY 2010, which was an increase of 499 students, or 1.1%. Table 3, however, shows relatively strong
private school growth through FY 2008 (up by 7,530 students, or 17%) followed by a steep decline (-7,031 students,
or - 3.6%) between FY 2008 and FY 2010. The steep decline after FY 2008 may have been influenced by the Great
Recession, declining contributions and average scholarships amounts under “private school STO-1” after FY 2008
(see Tables 1 & 2), and continuing growth in charter school options for school-age children.
The NCES reports an average K-12 private school tuition cost of $8,549 for all states and grade levels combined in
its most recent (FY 2008) private school survey. With an average scholarship of $1,914 in 2008 under “private
school STO-1” (see Table 2), the average scholarship would have covered 22.4% of private school tuition costs that
year.
Complexity
DOR indicates that it is administratively simple for individuals to donate to STOs and claim the credit. DOR notes,
however, that receiving donations is now significantly more complex for STOs, in that they must ask every donor if
they have given to another STO in the fiscal year, and, if so, how much and, if so, which tax year they will be
applying it against (because of the ability to give a donation until April 15 and count it against the prior tax year).
This is necessary because of the new income tax credit authorized by Laws 2012, Chapter 4, which establishes
specific criteria for how money generated by the new credit can be used for scholarships. DOR also indicates that
the annual reporting process for donations is time-consuming for both STOs and DOR because of the sheer number
of STOs and the fact that most STOs are staffed by volunteers, which leads to reporting inconsistencies and makes it
difficult for DOR to educate STO staff on reporting requirements. In addition, DOR describes its oversight
responsibilities over STOs as a "daunting task" that has not yet been fully accomplished and which has been affected
by changing statutory requirements.
- 21 -
Potential Performance Measures
Performance measures could include:
1. Percentage of STO revenues retained for administrative costs.
The STOs would have this information readily available.
2. Percentage of private school tuition paid with award funding.
This information appears to be collected by STOs, but would require additional reporting.
Prior Review
The credit was last reviewed by the Joint Legislative Income Tax Credit Review Committee in 2006. The
Committee recommended at that time that the credit be continued and placed on the 2011 review schedule. This date
was later moved back to 2012 due to changes in the income tax credit review schedule enacted by Laws 2009,
Chapter 32
PUBLIC SCHOOL EXTRACURRICULAR ACTIVITY FEE
TAX CREDIT
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Public School Extracurricular Activity Fee Tax Credit
Summary
• In Calendar Year (CY) 2011, the Public School Extracurricular Activity Fee Tax Credit was
claimed by 250,210 taxpayers. The total dollar value of the credit was $48.4 million, distributed
as follows:
o School districts – $42.0 million
o Charter schools – $6.4 million
• The average CY 2011 contribution was $194
o School districts – $186
o Charter schools – $262
o Total number of contributions – 250,210
• The average CY 2011 contribution per pupil was $46 (factored over all public school pupils
statewide)
o School districts – $45
o Charter schools – $54
• Eleven districts received more than $1 million each and accounted for $25.4 million (52%) of the
total.
• School districts with higher family income levels tended to receive higher average contributions
per pupil. Other factors affecting contribution levels could include:
o District administration
o Community involvement
Statutes
A.R.S. § 43-1089.01 (Individual Income Tax)
Description
This credit is provided to taxpayers for any fees or contributions made to a K-12 public school in support of
extracurricular activities or character education programs. School districts are not allowed to use any
portion of contribution revenues for program administration. Laws 2011, Chapter 195, however, permits
schools to use up to 50% of unencumbered contributions from 2010 and prior years on “short-term capital”.
Extracurricular activities are defined in statute as “school sponsored activities that require enrolled students
to pay a fee in order to participate.” The definition includes, but is not limited to, the following list of
items:
• Band uniforms;
• Equipment or uniforms for varsity athletics;
• Scientific laboratory materials; and
• In-state or out-of-state trips that are solely for competitive events.
Excluded from the definition of extracurricular activities are senior trips or events that are recreational,
amusement or tourist activities.
Regarding character education, A.R.S. § 15-719 specifies that a character education program must include
the following components:
• Instruction in the definition and application of at least 6 character traits;
• Activities, discussions and presentations on the application of the character traits; and
• Presentations by teachers or mentors who demonstrate the character traits.
- 24 -
Refundable
The credit is not refundable.
Carry Forward
The unused portion of the credit may be carried forward for a maximum of 5 consecutive years.
History and Rationale
The public school extracurricular activity fee tax credit was created by Laws 1997, Chapter 48 and became
effective January 1, 1998. The credit was added as an amendment in the Senate Education Committee to a
bill (HB 2074), which already contained provisions to establish a private school tuition organization tax
credit. In its final form, therefore, Chapter 48 created both the public school extracurricular activity fee tax
credit and the private school tuition organization tax credit.
As originally enacted, the maximum credit allowed was $200. Laws 2000, Chapter 1, 5th Special Session
increased the cap to $250 for married taxpayers filing a joint return. Laws 2005, Chapter 334 increased the
maximum credit for married couples filing jointly from $250 to $300 for taxable year 2005 and to $400 for
taxable year 2006 and thereafter. The maximum credit for single individuals and heads of households was
left unchanged at $200.
The credit did not initially contain a provision allowing a claim for contributions to character education
programs. These programs were added with the passage of Laws 2000, Chapter 313.
The statute creating the tax credit does not include a specific statement of purpose or a rationale.
According to a March 2002 Arizona State University Education Policy Studies Laboratory Report, the
credit was added to HB 2074 as a compromise to opponents of the original legislation. The likely intent is
to assist parents with the cost of extracurricular activities.
Revenue Impact
For Tax Year 2011, the Arizona Department of Revenue (DOR) reports that public schools received $48.4
million in extracurricular fees and contributions and that 250,210 individuals claimed $48.4 million in
related tax credits. Historical data on contributions and credits under the program are summarized in the
table below.
Table 1
Public School Extracurricular Activity Fee Tax Credit Contributions
Calendar Year
# of
Fees/Contributions $ Received
Average
Fee/Contribution
1998 74,242 $ 8,983,300 $121
1999 109,748 14,816,000 135
2000 149,215 17,458,200 117
2001 166,468 19,976,200 120
2002 143,697 22,416,700 156
2003 201,407 27,753,800 138
2004 213,987 30,958,900 145
2005 215,369 35,416,300 164
2006 218,664 43,230,433 198
2007 214,356 44,069,900 206
2008 233,450 45,164,400 193
2009 239,031 42,657,100 178
2010 250,004 43,718,700 175
2011 250,210 48,443,500 194
- 25 -
Table 1 shows that total fees and contributions have increased from $9.0 million in 1998, the first year the
credit was offered, to $48.4 million in 2011. The average contribution also has increased, from $121 in
1998 to $194 in 2011. The largest one-year growth occurred in 2006, which is when the maximum credit
increased to its current level of $400 for married couples filing jointly. Thereafter total fees and
contributions remained at roughly $44 million per year until 2011 (the most recently reported year), when
they increased to $48.4 million (10.8% growth). Laws pertaining to the program (including the maximum
allowed credit) were essentially unchanged for 2011, so the 10.8% growth observed for the year may have
been due to an improving economy.
DOR’s annual reports on “Arizona Income Tax Credits” assume that the amount of tax credits claimed by
individuals under the program in any given year equals total available credits. The revenue impact of the
program can not be determined with certainty; however, as an individual tax filer could claim a tax credit of
more or less than the amount of their current year public school fees and contributions under certain
circumstances. A filer would have to claim less than their total fees and contributions, for example, if it
exceeded the maximum allowable tax credit for the year. They would claim more than their current year
fees and contributions if their claim also included carry-forward credits from any of the past 5 years.
Laws 2011, Chapter 195 allows public schools to use up to 50% of unencumbered extracurricular program
fees and contributions received prior to FY 2011 to purchase “short term capital items,” such as textbooks
and equipment. Chapter 195 requires public schools to report such expenditures to the JLBC at the end of
each fiscal year. For FY 2012, 45 school districts and charter schools reported $1.6 million in short-term
capital expenditures under Chapter 195. The total includes $752,600 for technology (47%), $462,400 for
furniture and equipment (29%), $211,800 for instructional aids (13%), $143,700 for textbooks (9%) and
$42,700 for library resources (3%). Reporting districts and charters also indicate that they collectively had
approximately $7.1 million in total unencumbered pre-FY 2011 “tax credit” contributions available as of
July 1, 2011, which was the first day of the reporting period for FY 2012.
School districts are not allowed to use revenues generated from contributions for program administration.
The Arizona Association of School Business Officials (AASBO) has indicated that authorizing districts to
use 5-10% of revenues for administration might benefit some districts with the costs of running these
programs.
Economic Benefits
Measurable Economic Development
New Investments
Creation of New Jobs or Retention of Existing Jobs
This credit is not directly designed to promote economic development or spur new investments that would
result in new jobs. Instead, according to DOR’s August 2000 report “Income Tax Credits in Arizona,” this
credit is one of several tax credits in statute that are primarily intended to encourage cash contributions to
certain target groups in society, such as the working poor or students in private or public schools.
The $48.4 million in extracurricular fees and contributions reported for 2011 includes $42.0 million to
school districts and $6.4 million to charter schools. Eleven districts generated over $1 million each and
accounted for $25.4 million (52%) of total revenues (see Attachment 1). Twelve charter schools collected
over $100,000 each. Twenty districts and 74 charters did not report or reported receiving no contributions.
Contributions to school districts ranged from $0 to $284 per pupil in 2011, with an average per pupil
contribution of $45 ($42 million district total ÷ 929,700 grand total district Average Daily Membership
[ADM] pupils = $45). Charter contributions ranged from $0 to $390 per pupil in 2011 (for charters with at
least $100,000 in program revenues), with an average contribution of $54 per student ($6.4 million charter
total ÷ 119,700 grand total charter ADM = $54).
- 26 -
Attachments 1 & 2 rank school districts by total dollars received and dollars received per pupil. Attachment
1 shows that the largest school districts in the state tend to receive the most extracurricular fees and
contributions. The 2 largest school districts in the state, Mesa Unified and Tucson Unified, for example,
ranked 1 & 2, respectively, in total contributions and fees. Attachment 2, however, shows that small to
medium size districts tend to report higher average fees and contributions per pupil. Prescott Unified, for
example, (a medium size district) reported an average of $261 per ADM versus $97 and $59 for Mesa
Unified and Tucson Unified, respectively.
Attachments 1 & 2 also show each school district’s participation rate in the Federal School Lunch Program
in FY 2011. School district free or reduced price lunch data is often used as an indicator of average family
income levels in a community. For FY 2011, a child from a family of 4 qualified for a free school lunch if
their family had an annual income of $28,665 or less. They qualified for a reduced price lunch if their
household income was $40,793 or less. For FY 2011, 56.9% of public school students statewide qualified
for free or reduced price school lunches.
Comparing contributions per student with data on the percent of students eligible for a free or reduced price
lunch, a statistical analysis of the data revealed that school districts with a lower percentage of free or
reduced price lunch students generated a higher level of contributions per student and vice versa. Districts
with lower than average (56.9%) participation in the free or reduced price lunch program received an
average contribution of $65 per pupil in 2011, while districts with above average participation received an
average of $23 per student. (Charter schools were not analyzed in a similar manner as free or reduced price
lunch eligibility information was available for only a limited number of charters.)
While the above analysis demonstrated that a relationship between family income and contribution levels
exists, a further examination of the data established that the size of the district impacted the strength of this
relationship. In larger school districts with over 1,000 students, the relationship was much more
pronounced, meaning that income levels played a greater role in determining contributions in those
districts. The relationship was weaker in smaller school districts with 1,000 students or less, indicating that
income levels only had a slight impact on contribution rates in those districts.
Since family income levels only minimally affected contribution rates in smaller districts, and accounted
for some, but not all, of the difference in contributions in larger districts, there must be other factors that
impact contribution levels. Although there is no data available to evaluate the impact of other factors, one
such factor could include the ability of the school district administration to advertise the credit and make it
accessible to potential contributors. For example, a quick survey of certain school districts showed that
while most districts appear to advertise the credit on their web site and include a printable contribution
form, some districts do not. Another factor that might impact contribution levels is the community’s
involvement in its school system. Community involvement could include volunteer organizations, such as
the Parent Teacher Association.
Complexity
DOR indicates that the public school extracurricular activity tax credit has become more difficult to
administer since 2006 due to recent statutory changes. A.R.S. § 43-1089.01 now requires a public school
to report how the tax credit money was spent categorized by specific extracurricular activity or character
education program (see Table 2 below). It also now permits school districts to temporarily use up to 50%
of the unencumbered contributions received on or before December 31, 2010 for short term capital items
and requires participating districts to report such expenditures to the JLBC (see Table 3 below). These
changes have substantially increased data collection and reporting responsibilities for public schools and
DOR in administering the tax credit program. DOR notes that the new requirement that schools report how
they spent tax credit monies "(has) provided valuable feedback and an opportunity to contact schools that
might need additional assistance in determining if an activity is eligible for the tax credit."
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Table 2
Extracurricular Fee Funding by Category of Activity (CY 2011)
Description $ Spent % of Total
Athletics or Sports $12,183,076 26.7%
Field Trips 9,523,140 20.9%
Other Clubs 5,808,870 12.7%
After School Enrichment 3,587,883 7.9%
Fine Arts 2,360,882 5.2%
Band 2,122,509 4.7%
Extended Day or After School Program 2,051,457 4.5%
Extended Kindergarten Enrichment 1,470,306 3.2%
Character Education 1,064,697 2.3%
Music 1,042,972 2.3%
Short-Term Capital Items (Laws 2011, Ch 195) 1/ 848,764 1.9%
Non-Credit Summer Program 662,115 1.5%
Performing Arts, Drama Club, or Dance Club 625,007 1.4%
Choir 603,308 1.3%
Tutoring 525,519 1.2%
Academic Competitions, Chess Club, Speech & Debate 358,042 0.8%
Pending Requests for Extracurricular Activity 347,855 0.8%
Orchestra 294,615 0.6%
Driver Education or Behind the Wheel Program 155,367 0.3%
Total $45,636,385 100.0%
____________
1/ Total reported separately to JLBC for FY 2011 rather than CY 2011 was approximately $1.6
million (see Table 3).
Table 3
Short-Term Capital Purchases (FY 2011)
Description $ Spent % of Total
Technology $752,575 46.7%
Furniture and Equipment 462,357 28.7%
Instruction Aids 211,849 13.1%
Textbooks 143,696 8.9%
Library Resources 42,700 2.6%
Total $1,613,177 100.0%
Potential Performance Measures
Performance measures could include:
1. Student participation rates in extracurricular activities and character education programs.
While the school districts would have this information available, this measure would require them to
compile and report additional data.
2. Funding by type of activity.
Prior Review
The credit was last reviewed by the Joint Legislative Income Tax Credit Review Committee in 2006. The
Committee recommended at that time that the credit be continued and placed on the 2011 review schedule.
This date was later moved to 2012 due to changes in the income tax credit review schedule enacted by
Laws 2009, Chapter 32.
SOLAR HOT WATER HEATER PLUMBING STUB OUTS
AND ELECTRIC VEHICLE RECHARGE OUTLETS
TAX CREDIT
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Solar Hot Water Heater Plumbing Stub Outs
And Electric Vehicle Recharge Outlets Tax Credit
Summary
• The cost of the Solar Hot Water Heater Plumbing Stub Outs and Electric Vehicle Recharge Outlets
Tax Credit was $1,568 in tax year 2009, and $0 in tax years 2010 and 2011. Credit use has never
exceeded $12,000 in a single year.
• The Individual Income Tax credit was claimed by 16 taxpayers in tax year 2009 with an average claim
of $98. There have been no Corporate Income Tax credit claims since 2000.
• Trends have favored other technologies more than those promoted by this tax credit.
Statutes
A.R.S. § 43-1090 (Individual)
A.R.S. § 43-1176 (Corporate)
Description
The statutes provide individuals or corporations with an income tax credit for installing residential 1) solar
water heater plumbing stub outs, or 2) electric vehicle recharge outlets. A “stub out” is a fixture that is
designed to accommodate additions to the original plumbing. The statute defines the specific types of pipes
and wires that are required for the stub out to qualify for the tax credit. The recharge outlets must be
connected to the utility system by a dedicated line that meets various codes and industry standards.
The credit cannot exceed $75 for each installation for each separate dwelling unit. The credit may be
transferred from the builder to the purchaser of the dwelling.
Refundable
The credit is not refundable.
Carry Forward
The unused portion of the credit may be carried forward for a maximum of 5 consecutive years.
History and Rationale
Arizona’s current solar energy device tax credit was signed into law in June 1994 (Laws 1994, Chapter
117) and became effective for the 1995 tax year. (See separate discussion on Commercial and Industrial
Solar Energy Device Tax Credit.) Laws 1997, Chapter 218 amended the list of qualifying solar energy
devices to exclude “a solar hot water heater plumbing stub-out that was installed by the builder of a house
or dwelling unit before title was conveyed to the taxpayer.” This law also created a separate tax credit for
these devices (A.R.S. § 43-1090).
The statutes creating the tax credits for solar stub outs and electric vehicle recharge outlets do not include a
specific statement of purpose or a rationale. The credits were included in a floor amendment to SB 1523
that was passed by the House Committee of the Whole. An earlier bill, HB 2440, which included
provisions for the solar energy device tax credit, was heard by the House Ways and Means Committee. At
that time, the bill’s sponsor stated the purpose of the solar energy tax incentives was to restore Arizona to a
position of leadership in the solar energy field and to promote energy efficiency.
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Revenue Impact
The preliminary cost of the individual tax credit was $1,568 in 2009, the last year in which individual
credits were used. The corporate income tax credit has not been claimed since 2000. The data in Table 1
below, which was provided by the Arizona Department of Revenue, shows the individual income tax
impact of this credit.
Solar Energy Industry Trends
When the solar stub out credit was created in the late 1990s, water heaters were the primary focus of solar
energy technology and public policy. In spite of federal and state tax incentives and public utility rebate
programs, solar water heaters did not prove to be widely popular among consumers and businesses. In
spite of the credit, there was little interest from home builders and buyers in plumbing modifications for
solar water heater installations.
In recent years, solar energy technology has evolved, and tax incentives and regulatory policies have
emerged to encourage investment in photovoltaic systems that generate electricity rather than merely heat
water. At the same time, growing interest in other forms of renewable energy, such as wind, biomass, and
biodiesel fuels, has diverted some energy investments away from solar energy technologies.
Electric Vehicle Industry Trends
The federal government established a tax credit for the purchase of qualified electric vehicles with the
Energy Policy Act of 1992. The credit, which was for 10% of the cost of the vehicle up to a maximum of
$4,000, expired in 2007. A similar credit of $2,500 to $7,500 for purchase of a plug-in electric vehicle
Table 1
Solar Hot Water Heater Plumbing Stub Outs and
Electric Vehicle Recharge Outlets Tax Credit – Individual Credit Claims by Tax Year
Tax Year
# of
Claimants
Total Credit
Available Credit Used Carry Forward
1998 23 $12,352 $8,874 $3,478
1999 35 16,859 7,944 8,915
2000 35 21,308 11,566 9,742
2001 18 16,951 7,804 9,147
2002 15 4,920 3,312 1,608
2003 2 x x x
2004 17 15,220 5,677 9,543
2005 22 18,538 9,687 8,851
2006 6 525 525 0
2007 0 0 0 0
2008 11 1,053 930 123
2009 16 2,850 1,568 1,282
2010 0 0 0 0
2011 0 0 0 0
____________
# of Claimants – the number of taxpayers who claimed the credit in each year.
Total Credit Available – the total tax credits identified in each tax year, including any new credits and
any credits carried over from a previous year and identified in that year.
Credit Used– the total value of credits claimed in each year.
Carry Forward– the total credit identified but not used in each year. The full carry forward may not be
reflected in the following year's estimate. For example, an individual could have $500 in credit
identified in tax year 2008, use $400 of it in 2008 (leaving $100 as a carry forward). If that individual
did not identify or claim that credit in 2009, that $100 carry forward could not be included in the carry
forward total for 2009.
x – No data released by the Department of Revenue.
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(PEV) bought after December 31, 2009 was created by the American Recovery and Reinvestment Act of
2009. The size of the credit depends on the vehicle’s battery capacity and weight. This incentive remains
available to buyers until manufacturers’ sales of these vehicles grow to 200,000 in a calendar year quarter.
The federal government also provided subsidies to manufacturers to promote the development of PEVs.
Sales of PEVs have begun to grow moderately as new models become less expensive and can be driven for
longer distances without being recharged; however, non plug-in hybrid vehicles that combine internal
combustion engines with electric motors remain substantially more popular.
Economic Benefits
Measurable Economic Development
New Investments
Creation of New Jobs or Retention of Existing Jobs
There is no economic development at this level of credit usage. Investment in solar energy equipment has
increased in recent years, whereas the market for plug-in electric vehicles remains small compared to the
market for hybrid electric vehicles.
Complexity
The credit does not appear to be unusually complex in its description, calculation and application. The low
usage of this tax credit, however, does not appear to warrant the related administrative costs.
Potential Performance Measures
At this usage level, administering performance measures would outweigh the tax expenditure from the
credit.
Prior Review
The credit was last reviewed by the Joint Legislative Income Tax Credit Review Committee in 2006. The
Committee recommended at that time that the credit be eliminated. No bill was introduced during the 2007
regular session to repeal the credit.